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CME: Fed Cattle Futures Under Pressure

03 October 2016

US - The number of cattle that will to come to market on a weekly basis in Q4 should decline from the torrid pace (+7 per cent) in Q3 but it still is expected to be about 3‐3.5 per cent higher than the previous year, according to the latest Daily Livestock Report by Steiner Consulting Group,

At this point fed cattle futures remain under some pressure, with feedlots still struggling to balance the increase in feeder supplies (large calf crops) with a short term inelastic cattle processing capacity.

There has been some surprise recently as to the sharp pullback in fed cattle values but it is always important to remember a) the timing of packer sales given seasonal promotions and b) the timing of farmer feeder sales as they prepare for harvest.

Packers were quite aggressive in slaughtering cattle over the summer, ramping up Saturday slaughter schedules, because they felt confident they could push more beef into retail channels.

Evidence of this was the sharp increase in the value of 50CL beef in late June and early July, with prices hitting the low 90 cents per pound. Product was committed for retail and those looking to buy fat trim in the spot market found it was hard to come by.

Now the price of 50CL beef is 33 cents, the market is swimming with fat trimmings and likely some of this is going into freezers. As ground beef/grilling demand has seasonally subsided, so has the desire of packers to run shifts on Saturday.

None of this is too surprising and seasonally fed cattle slaughter declines in Q4 (see top chart). The challenge, however, is that feedlots have a strong incentive to stay aggressive in marketing cattle.

There are more calves in the country that will become available for placement in the next few months and feed costs are low. Not all is negative, however.

The latest cattle on feed report showed that front end supplies are much more current than a year ago and steer weights also have been trending well under last year’s levels. Yesterday USDA reported that for week ending September 17 dressed steer weights averaged about 905 pounds per carcass, 2 pounds more than the previous week but some 18 pounds (‐2 per cent) lower than the previous year.

There is some hope that as packers get ready to fill holiday needs they will be a bit more active on the buying side. For now, however, they are content to sit back and let feedlots trip over each other in pushing prices lower.

The composition of slaughter seasonally declines as well in Q4, with more cull cows in the mix. Fed slaughter for the week ending September 17 was 491,501 head, 6.1 per cent higher than the previous year.

We think fed slaughter for the week ending September 24 was 478,000 head and it is expected to be around 481-483,000 for the current week. Cow and bull slaughter for the last reported week was 119,791 head, 4 per cent larger than a year ago.

Beef cow slaughter has been running well above year ago levels for much of the spring and summer. Weekly beef cow slaughter averaged 14.4 per cent above year ago in Q2 and it was 22.9 per cent higher in Q3.

We expect beef cow slaughter in Q4 to trend higher again, likely 8‐9 per cent above last year. Dairy cow slaughter is a puzzle.

There was a lot of talk earlier this year about burdensome dairy supplies and USDA announced buying some cheese stocks in order to help the market. And yet producers have shown little desire to cut back on dairy cow numbers.

Dairy cow slaughter averaged 2 per cent under last year in Q2 and it was down 1.7 per cent in Q3.

The number of milk cows in August was estimated at 9.360 million head, 0.5 per cent larger than a year ago. And yet milk prices keep going down. It is possible we could see a modest increase in dairy cow slaughter in Q4. Non‐fed slaughter by November and early December should peak at around 126,000 head.

TheCattleSite News Desk

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