July 28, 2008
Good Morning from the Chicago Board of Trade,
Cash Cattle Situation and Outlook:
We left last week with a fed cattle market that trades mostly $2-$3 lower, a cattle-on-feed report that came in neutral to slightly bearish, and a cattle inventory report that came in mostly neutral. First we will recap the on-feed and inventory reports. Cattle-on-feed in the nations feedlots July 1, 2008 totaled 10.295 mil head or 95.9 % of a year ago (95.5%), placements during the month of June totaled 1.513 mil head or 91.3% of a year ago (91.8%), and marketing’s during the month of June totaled 1.973 mil head or 92.2% of a year ago (95%). The semi-annual cattle inventory report showed all cattle and calves in the United States July 1 at 104.3 mil head or 99.5% of a year ago (99.3%), total cows and heifers at 42.4 mil head or 99.8% of a year ago (99.2%), beef cows at 33.1 mil head or 99.4% of a year ago (98.8%), milk cows at 9.3 mil head or 101.1% of a year ago (100.6%), and beef replacement heifers at 4.6 mil head or 97.9% of a year ago (96.1%). Other categories of importance in the inventory report were heifers 500 lbs and over at 16.5 mil head or 99.4% of a year ago (99.4%), milk replacement heifers at 3.9 mil head or 100% of a year ago (100.3%), other heifers at 8 mil head or 100% of a year ago (101.5%), steers over 500 lbs at 14.7 mil head or 98.7% of a year ago (99.8%), bulls over 500 lbs at 2.1 mil head or 100% of a year ago (98.2%), and calves under 500 lbs at 28.6 mil head or 99.7% of a year ago (99.3%). The annual calf crop was estimated at 37.3 mil head or 99.6% of a year ago (99.4%), cattle on feed in all feedlots was estimated at 11.7 mil head or 95.1% of a year ago, and feeder cattle and calves outside of feedlots was estimated at 39.6% of a year ago. Pre-report estimates are in parenthesis.
The on-feed report will be considered a neutral to slightly bearish as the marketing number came in below pre-report expectations, however I think the market knows this already as evident by an increase is carcass weights the last couple of weeks and the fact that we are still killing 58% choice cattle. Also there were less Canadian cattle in the slaughter mix this year compared to last, which along with overall fewer numbers of U.S. cattle on feed would help to explain some of the discrepancy in the estimates. The placement breakdown showed we placed 40,000 head or 5% less cattle weighing under 700 lbs and 94,000 head or 10% less cattle weighing over 700 lbs. This combined with a decrease of 155,000 head or 11% less cattle weighing over 700 lbs in May is still going to be supply friendly the Oct, Nov, Dec fed cattle market. I think this is also friendly the feeder cattle market, as there is a reason we have placed 249,000 head less cattle weighing over 700 lbs in the last two month, that reason being the cattle are not out there. Much of the on-feed report has been priced into the futures market, however we still need to get some of these backed up cattle gone, which is going to keep some pressure on the front end of the board.
The inventory report came in pretty much as expected and once again showed the nation’s cattle herd is shrinking, not expanding. The entire inventory as expected declined by 500,000 head, due mainly to a 200,000 head decline in the nations beef cow herd. Some analysts, including myself think that the USDA may have over estimated the beef cow herd, considering our total cow slaughter ytd is running 6% above a year ago, with the beef cow slaughter alone being 9% above a year ago. One important aspect to the inventory report for later this year is the fact that feeder cattle and calves outside of feedlots totaled 300,000 head more than a year ago as cattle continue to be warehoused outside of feedlots due to the high price of corn. These cattle, just like last year, will be coming off of grass late this summer and early fall and will be placed into the first of the year fed cattle marketing timeframe, which leaves Feb and April live cattle futures a little vulnerable on rallies. I don’t think the inventory report will have much of an affect on the market this morning; however it does provide support from a supply standpoint going into next year.
Next was last Friday’s fed cattle trade where we saw Texas/Oklahoma feedlots sell cattle for mostly $95 live, Kansas sell cattle for mostly $94 live and $1.49-$1.50 dressed, and Nebraska feedlots sell cattle for mostly $94.50-$95.50 live and $1.52 dressed. Sales volumes again look to be moderate with the USDA estimating 85,000 head of cattle sold in their late Friday afternoon report. I will report on the actual totals tomorrow morning once everything is counted and reported this morning. We need to be selling more cattle than this on a weekly basis and until we get some of these backed up marketing’s cleaned up, the market is going to have a hard time rallying. Last weeks feeder cattle market was mostly $2 higher across the board as yearling feeder numbers remain tight and backgrounders came into the calf market to purchase some inventory, thus supporting the lightweight feeder cattle market. The slaughter cow market was mostly higher last week. I will continue to look for a steady to higher feeder cattle and slaughter cow market for this week. The fed cattle market will have a hard time rallying, and will be lower early in the week, however if we get some of these numbers moved we could find some support late in the week and going into next week.
Cash Beef Situation and Outlook:
Last weeks cattle slaughter was estimated at 668,000 head and included at Friday slaughter of 126,000 head and a Saturday slaughter of 42,000 head. The weekly kill produced an estimated 518-mil lbs of beef. The year-to-date cattle slaughter is running 1.1% above a year ago at 19.552 mil head with ytd beef production running 1.9% above a year ago at 15.037 bil lbs. Through Thursday of last week the choice boxed beef lost $9.29 to settle at $160.38 and the select boxed beef lost $5.77 to settle at $155.57 on increased movement of 1,138 loads of fabricated cuts of beef sold. Friday saw another lower day in the beef market with the choice cutout closing $1.88 lower to settle at $158.50 and the select cutout closing $3.00 lower to settle at $152.57. Sales volume was good with 415 loads of beef sold (220.96 loads of choice fab cuts, 135.33 loads of select fab cuts, 7.90 loads of trim, 50.74 loads of grinds). The choice/select spread settled at $5.93 a gain of $1.12 on the day, however a loss of $1.57 for the week.
The boxed beef market was mostly lower last week on capitulation in the middle meat markets. A lack of export business and overall negative psychology weighed on chuck and round cuts, however those items were beginning to find some support late in the week from export customers and grinders. More importantly though, we were beginning to see some buyers step back into the rib and loin complexes, as they perceived the recent break as a buying opportunity. Volumes were not huge, but the fact that someone was willing to come back into the market for these items should provide a little support to prices this week. Ground beef and boneless beef items remain in good demand and price reflects this. I will call for a steady to lower boxed beef trade early this week, with the market stabilizing by late week.
Futures Market Situation and Outlook:
For the week August live cattle settled at $97.82 a gain of $.32, October live cattle settled at $105.10 steady on the week, and December live cattle settled at $107.30 a loss of $.77. In the feeder cattle pit, August feeder cattle settled at $111.75 a loss of $2.12, September feeder cattle settled at $111.92 a loss of $2.58, and the October feeder cattle settled at $113.27 a loss of $3.00. The reported CME feeder cattle index for 7/24/08 was $111.34 a loss of $.11 for the day, however a gain of $.18 for the week.
Fridays live cattle volume saw 19,309 contracts trade in the pit and 9,849 contracts trade on Globex. Live cattle open interest gained 1,653 contracts to come in this morning at 301,140. Friday’s feeder cattle volume saw 3,351 contracts trade in the pit and 1,255 contracts trade on Globex. Feeder cattle open interest gained 184 contracts to come in this morning at 32,631. For the week live cattle open interest gained 3,628 contracts and feeder cattle open interest declined 2,311 contracts.
The latest commitment of traders report for the period ending 7/22/08 showed funds net long 41,980 contracts of live cattle futures and options a decline of 13,453. Commercials were net short 237 contracts of live cattle F/O a decline of 11,898, and the small specs were net short 41,743 contracts of F/O a decline of 1,555. In the feeder cattle market, funds were net long 4,737 contracts of futures and options a gain of 1,943, commercials were net long 3,212 contracts of F/O a decline of 1,452, and the small specs were net short 7,949 contracts of F/O a gain of 489.
The live cattle futures market for the most part held together in the front month contracts as we already had a mostly lower fed cattle trade priced in for last week. Accounts continued to take premium out of the back end of the live cattle board last week, which meant those contracts lost more then the front. Feeder cattle futures lost ground last week as they carried too much premium to the CME feeder cattle index and the losses incurred in the deferred live cattle futures. Looking into this week, as I mentioned above I think most of the on-feed report was priced in and the inventory report will be mostly a non-event. We do need to do something with the basis in August and October live cattle early today and we can expect to see a lower open there. However, I think an early week break will need to be bought in all live and feeder cattle contracts, especially the December live and August feeder cattle, as both the on-feed and inventory report paint the most bullish picture for these two contracts. With that said, I do expect August live cattle to find good support at $96 early this week and October to find support at last weeks low of $103.80. Look for a $.20-$.30 lower open to live and feeder cattle futures this morning. Trade Well!!!
Any one wanting a more detailed report on the cattle and beef markets including fundamental, chart and technical analysis, plus spec/hedge recommendations for packers, processors, producers, and meat buyers feel free to contact me by phone or e-mail to set up a free trial.
There is risk in trading futures and options.
Have a Good Day,
Troy Vetterkind
Chicago Board of Trade
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