US - Wednesday’s fed and feeder cattle rally proved to be short lived and cattle futures resumed their downward slide on Thursday, write Steve Meyer and Len Steiner.
Reports of lower cash prices both for feeders and fed cattle likely impacted the market. Beef prices also continue to move lower.
The choice beef cutout in the morning sheet on Thursday was down 84 cents and the afternoon report had the choice cutout down $1.51 compared to the previous day.
So far fed cattle cash prices have declined at a faster pace than they did a year ago and futures are implying that the cattle price discount for October and December will follow the same trajectory as a year ago.
While in the very near term market participants may be inclined to see continued downside in the fed cattle market, one can point to a number of differences (at least from a supply perspective) between 2016 and 2015.
First, lets look at the supply of cattle that are close to being market ready. The August feedlot survey pegged the supply of cattle that have been on feed for more than 120 days at 3.515 million head, 5.2 per cent lower than the previous year but higher than what it was in July.
At this point we expect the September report to show the +120 days fed cattle inventory down some 200k head from the previous month and down almost 300k head (-8.2 per cent) from a year ago.
There are two counter arguments to this. One, that because cattle are being placed on feed at heavier weights this means they do not need as much time to get market ready or, if they spend the same time on feed, they will come to market at heavier weights.
Second, that the monthly feedlot survey does not capture structural change, in other words, there are smaller feedlots out there (less than 1000 head).
Therefore, we are understating the supply of market ready cattle. In addition, if we do have a larger percentage of small feeders out there that could contribute to the further downtick in the market, especially as some of those are corn farmers looking for some liquidity going into what promises to be a historic corn bumper crop.
Now we are in the realm of speculation at this point and I cannot think of another year when I missed the USDA July cattle report more than this year. Without that report, which gives us an estimate of cattle on feed in ALL operations, we are left guessing as to what the real supply on feed is at this point.
It does appear to us that some feedlots capitulated this week, with some cash prices reported as low as $105/cwt, about $10/cwt from just a couple of weeks ago. But returning to the differences between 2016 and 2015, we should point out that feedlots have been much more aggressive in marketing cattle and this has started to show up in terms of lighter steer weights.
USDA published its weekly estimate of steer weights yesterday, showing average dressed steer weights at 896 pounds, 3 pounds higher than the previous week but 10 pounds (-1.1 per cent) lower than a year ago. Keep in mind these weights are for the week of August 27.
We estimate that weights for the week of September 10 are 899 pounds, down 20 pounds (-2.2 per cent) from last year.
Finally, we would also like to point out the big difference in trade flows expected in the second half of 2016 vs. the same period in 2015. Australian beef exports to the US in July and August were down 57 per cent and we don’t see them recovering any time soon. And Brazil is not expected to bring any meaningful volumes until 2018. On the other hand, US beef shipments are expected to be up 22 per cent higher in Q3 and 9 per cent higher in Q4.
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