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CME: Fed Cattle Futures Higher on Monday

12 June 2019

US - Fed cattle futures were higher on Monday even though it was a rather slow day in terms of fundamental news, reports Steiner Consulting Group, DLR Division, Inc.

There was no special announcement on exports or a sudden jump in the cutout or any report pointing to a supply imbalance in the future. Rather, some market participants think the rally was mostly due to money flow and an oversold market.

It will be interesting to see what USDA shows in its comprehensive cattle report, particularly with regard to the number of fed cattle that packers have bought for delivery 15-30 days out.

The last report, for week ending 3 June, was a bit surprising, showing packers paid a slightly higher price ($185.37 dw) for cattle delivering towards the end of the month than for cattle scheduled for delivery in the first two weeks of June ($184.38).

The selloff last week and the big basis may have induced some selling but it will be interesting to see how much the picture has changed. What we are fairly confident at this point is that packer margins got better last week.

Assuming a dressed weight fed cattle price of $183/cwt and a comprehensive cutout of $217.68 results in a gross packer margin of around $394/head, the highest so far this year but below the $438/cwt for the same week last year. Packer margins have steadily improved in the last few weeks and this should incentivize higher fed slaughter in the next few weeks.

One of the weekly USDA reports that we regularly review is the one that deals with packer forward cattle purchases. This is a relatively recent report and with only a few years worth of data so it is difficult to use it to infer price relationships. But it may be useful to infer risk perception.

Market participants will not come out and tell you what they are thinking about the market out front but one can look at what they do and use that as a basis for understanding. At this time packers have accumulated a significant forward cattle position for the summer and early fall.

As the chart below shows, packers currently have contracted 226k head of cattle for delivery in August compared to 151k head they had bought at this time last year and 229k head two years ago. It is interesting that packers have more cattle bought for delivery in that month than in 2017 even though in 2017 beef prices were dramatically higher than they are today.

The position for September is even bigger. Since the beginning of April packers have added about 61k head to their August position. Last year during this period they added just 5,100. In 2017 there was a similar increase in the number of cattle purchased for late summer and early fall (see the following table).

It would seem that packers perceive more upside risk at this time and we can only speculate as to why that is. It could be that they see better demand and want to make sure they have covered a larger percentage of the cattle that they need. This demand could be through exports, especially with ASF potentially changing global meat trading. And better demand could also result from robust domestic features, both at retail and foodservice.

Beef purchases for delivery 90 days or further into the future have increased in recent weeks. For the last four weeks packers have sold an average of 422 loads/wk on that basis, 67 percent more than the same period a year ago. This could be beef secured by retailers for Labor Day features or by foodservice operators for fall needs.

But packers don’t have a crystal ball with regard to demand. They perceive higher risk and try to position themselves correctly. The downside risk comes from participants overestimating demand risk. If that happens, then the additional cattle supplies they have purchased could depress demand for cattle in late summer and pressure prices lower.

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