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CME: Futures Price Significant Discount for Cattle for Remainder of 2019

04 September 2019

US - Despite the disruptions caused by the closure (temporary) of a 5000 head capacity plant in mid-August, fed cattle slaughter has so far managed to stay near year ago levels, reports Steiner Consulting Group, DLR Division, Inc.

We do not have the final estimates from USDA for last week but think that fed slaughter for the week ending 31 August was 513,000 head, 0.2 percent higher than a year ago. In the last two weeks fed cattle slaughter, again per our estimates, was 1.3 percent higher than a year ago.

Record high profits as well as the need to continue to fill orders for customers that need to run their businesses induced beef packers to process more cattle during Saturday shifts. Normally plants will schedule a certain number of Saturday shifts depending on labor availability, the level of demand and supply of cattle.

We think Saturday fed cattle slaughter last week was around 20k head larger than the same Saturday a year ago. The week before Saturday slaughter was estimated at 66k head, about 18k head or 37 percent higher than a year ago.

Total cattle slaughter last week was estimated at 644,000 head, 0.1 percent lower than a year ago. Overall slaughter is lower despite the increase in fed slaughter due to fewer cows and bulls coming to market in August.

The choice beef cutout was lower last week, a result of fed slaughter tracking a bit higher than a year ago and the seasonal tendency for beef prices to take a step back after Labor Day. There is still a fair amount of grilling that will still take place, especially with NFL season getting underway this week and college football already playing games.

However, weather is slowly turning and the start of the school year represents a different demand dynamic, in part because the start of the school year represents additional expenses for the average family.

Beef demand tends to soften both at foodservice and retail and it will be hard to maintain some of the lofty levels we saw at the end of August, especially since in many cases they were artificial, the result of users caught short and needing product to cover immediate needs.

At this time, futures have priced a significant discount for cattle for the remainder of the year. Feedlot inventories are just as large as they were a year ago and it is still not clear if the packers will be able to run enough Saturday shifts to accommodate the available supply.

As of 1 August the supply of cattle that had been on feed for more than 120 days was 4.021 million head, 1 percent higher than last year and 15 percent higher than two years ago. In addition, placements of cattle over 800 pounds during May, June and July were some 90,000 head higher than a year ago.

Those additional cattle will have to be marketed this fall. There will be strong demand for processing services this fall, hence the current discount for October.

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