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CME: Cattle Futures Moving Lower

26 August 2016

US - Fed and feeder cattle futures have been moving lower in recent days and, in some cases, are approaching the contract lows, write Steve Meyer and Len Steiner.

The October 2016 fed cattle futures contract closed yesterday afternoon at $108.9/cwt, down about 135 points for the week but still some 300 points above the contract low established on July 21.

While there are probably some technical factors that have contributed to the slump in futures, fundamentally there are also some factors that, at least in the short term, have encouraged this round of selling.

Cutout values are slipping. This should not come as a surprise but it is impacting how traders view the market going into the fall and winter. It is not terribly unusual for beef prices to soften past Labor Day.

Retailers are likely looking to fill the meat case with a more balanced mix of protein after aggressively featuring steaks and ground beef over the summer. Spending on school supplies also tends to stretch consumer budgets in late August and September, which again does not favour beef.

One clear indication of this is what is happening with the 50CL beef market. This item, which accounts for roughly 10 per cent of the carcass, was trading around 90 cents per pound in late June and early July as retail promos focused on hamburgers and ground beef.

Last night 50CL beef was quoted at around 49 cents per pound. The decline in the price of 50s alone has removed about $4/cwt from the value of the carcass, offsetting gains that packers have made in selling chucks and rounds.

Cold storage stocks are heavy. We touched on this in our report two days ago, showing a counter seasonal increase in beef inventories. The biggest increase in beef stocks was in the Mid-Atlantic region.

The increase in stocks is not due to packers pang more beef in storage, rather it appears that end users took advantage of some low prices for fall items and build up their stocks on hand. Larger inventories of competing meats also were seen as negative for the beef complex

There will be plenty of pork and chicken this fall. Pork supplies are particularly burdensome and hog slaughter now at 2.3 million head is seen as broadly negative for the entire meat complex.

Steer weights are moving higher. Again this is one of those items that should not really be a surprise but for some reason resonates with market participants. Steer weights over the summer were slightly under last year but they are moving up in step with the normal seasonal.

There was some hope that the aggressive pace of marketings would push weights significantly under last year. However, it is important to keep in mind that as feedlots place cattle on feed at ever larger weights, those animals will also come out at heavier weights. Please note in the attached chart that the last three data points reflect our estimates for the last three weeks.

Cattle slaughter this week is expected to be near 600k head, which is quite large for this time of year. Feedlots remain quite aggressive in marketing cattle, in part because the market is paying them to do that via the positive basis. As a result, cash prices have been slipping, from $118 last week to around $114 now.

Fears of a stronger dollar also continue to weigh on the market, especially as the FED is considering raising rates at a time when other countries are lowering them.

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