The fed cattle sector is already seeing lower prices than expected this summer and we are entering the period of the year when beef demand falls off and more cattle come to market.
And the Brexit development last week didn’t help. It had no real immediate impact on cattle fundamentals, but the scare to the wider markets pulled money generally out of all commodities including the cattle futures market.
A lot of people have been scratching their heads about the Chicago cattle futures market.
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There seemed to be something of a vicious circle in the United States this year with a weak Chicago cattle futures market giving feeders no incentive to keep cattle for a longer period, so they are selling cattle at lighter weights. They are pushing them on the market even as the cash price falls because the signal from the futures market is that prices will be even lower in the future.
But with each lower cash sale, it signals back to Chicago traders to push the futures price even lower.
With lots of cattle coming to market and good profit margins between the cattle price and beef price, American packers recently have pushed kill levels to the highest in two years.
And on the feeder side of the market, the futures market was under pressure because of the falling autumn fed cattle market and rising corn futures. However, the corn market has now sharply sold off to a lower level as worries about the potential for a hot dry July in the U.S. Midwest fade.
Canadian market watcher Canfax says that the cash fed market here will likely drift lower through the summer, setting seasonal lows in August or September.
But Steve Kay of Cattle Buyers Weekly says the futures market’s indication of summer and early fall prices might be too pessimistic.
He notes that because feedlots have been selling cattle early, it could result in fewer market ready animals later in the summer.
It will be important to watch carcass weights because if they drop, it will confirm that packers are current in their marketing and should be able to hold out against packers to push prices higher.
He also argues that beef sales in the U.S. on the Memorial Day weekend and since then have been higher than in the same period last year.
Taking these two factors together, Kay argues that cattle prices should see some recovery.
But Kevin Grier of Canadian Cattle Buyer notes a lot of the cattle already marketed in the U.S. were sold on deferred delivery of three to five weeks so that could give packers ample supply just when feedlots would gain leverage under Kay’s argument. Still, Grier thinks fed prices could improve by about $2 per hundredweight over the next two weeks.
The United States Department of Agriculture’s cattle on feed report on June 24 also dimmed the hope for a significant price rally.
The number of cattle placed in U.S. feedlots in May jumped by 10 percent. That was slightly more than the average of pre-report expectations.
Those cattle will be market ready in the third quarter of the year.
The U.S. quarterly USDA Hogs and Pigs report also issued June 24 showed the American hog herd is growing faster than expected and the number of market ready hogs in the third and fourth quarters will likely be more than expected.
So supplies of U.S. beef, pork and poultry should all be plentiful this fall, keeping the meat market highly competitive and unlikely to see price increases.
One issue from Brexit that could influence the North American livestock market is the currency fallout.
Brexit will likely weaken the euro and strengthen the U.S. dollar.
One bright spot in North American livestock in recent months has been the strong pork demand from China.
The EU is already a strong competitor for the China market and if its currency falls, it could capture an even bigger percentage of that lucrative outlet, leaving more pork on the U.S. market to depress prices.
The cattle futures market is frustrating for producers. In the U.S., R-CALF convinced the Senate to get the U.S. Government Account-ability Office to study the impact of high frequency trading and other issues on the functioning and accuracy of the cattle futures market.
However, there are some fundamental supply and demand factors that are bearish for livestock markets in the second half of this year.
