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CME: Increase in Supply of Forward Contracted Cattle

22 August 2019

US - Different from the hog industry where packers own about a third of all the hogs coming to market, the supply of packer owned cattle is quite small. And that supply has gotten smaller following the sale of some company assets in late 2017 and early 2019, according to Steiner Consulting Group, DLR Division, Inc.

Through the Mandatory Price Reporting system packers report not just the price paid for cattle in a given week but also the number of their own cattle that was brought to market. For the week ending 16 August, USDA reported that packer owned cattle (domestic source) were 11,075 head, higher than the 9,850 reported for the comparable week a year ago but still about 43 percent smaller than the five year average.

One needs to put this number in the overall context of fed cattle slaughter for the week. According to USDA, total fed cattle slaughter last week was estimated at 519,000 head, with packer owned cattle making up about 2.1 percent of the total.

While packers do not own many cattle outright, they work closely with feedlots either through formula arrangements or by purchasing cattle on a forward basis. One can argue that once cattle are purchased on a forward basis they are owned by the packer even as the feedlot will continue to feed those cattle until delivery.

The supply of forward contracted cattle has increased but so has the supply of fed cattle in feedlots and overall slaughter. So rather than simply focusing at the absolute numbers, it is appropriate to look at forward contracted share of the total supply coming to slaughter.

Last week, USDA reported that there were 56,681 domestic forward contracted cattle that came to slaughter. We say domestic since there were also about 3,342 head that were forward contracted with feedlots in Canada and delivered to packers last week. The total supply of cattle that were reported in the system last week was 469,779 head (see chart below for a full breakdown).

This implies domestic forward contracted cattle accounted for 12.1 percent of all the cattle reported in the system. Last year for the comparable week the supply of forward contracted cattle was 6.3 percent. The share of forward contracted cattle has increased from last year but it is still in the range of the last five years.

Faced with more demand to book beef forward from end users, it makes sense that packers have relied on forward contracts to hedge their risk. And we expect to see more forward contracted cattle than a year ago for the balance of the year. The chart on below illustrates the current position of forward contracted cattle compared to what was contracted at this time in the past three years.

More cattle contracted on a forward basis than last year and tighter packing capacity could limit the upside in the cattle market this fall. Ultimately, however, it will be the cutout and the willingness of retailers to continue to feature beef this fall that will determine the direction in the cattle market.

Another interesting difference between the cattle and hog data is the higher percentage of cattle that are still traded on a negotiated basis. While this percentage has declined over time, in the latest update it stood at about 19 percent of all the cattle reported in the system. For hogs it is 2 percent. About two thirds of the cattle that were reported by packers last week were priced using some type of formula.


Daily Livestock Report - Copyright © 2008 CME. All rights reserved.


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