Market outlook
Bull market on holdBy Dennis Smith
The Oct. 23 live cattle contract expired at an all-time high for any cattle contract ever. The expiration price was $183.75 which was about 200 points off the contract high set in September.
The most recent cattle-on-feed report was bearish in the short term, showing September placements up 6% versus last year. Larger than expected placements were fostered by active placements in the southern plains with placements in both Texas and Kansas up 13%. At the same time the marketing of cattle into the slaughter plants was very poor (down 11%) with marketings very slow in the south.
This report created a firestorm of selling, driving futures sharply lower thanks to the expanded daily range of trade allowed by the CME.
The huge break that actually started a few days before the report was released amounted to 860 points in the most active December live cattle contract and 1710 points in the January feeder cattle contract. The on-feed report was long-term bullish in that it showed heifers on-feed as a percentage of total at 40%. This means no one is holding back heifers for breeding, they’re all going into the feedlot.
Thus, the beef industry is entering the fourth year of a deep herd contraction. This contraction has been fostered by many items, most of which is persistent drought in the Great Plains. Currently drought remains a severe problem mostly in the southern plains.
Some perspective on what’s been happening in the industry is necessary to understand and predict what may happen in the future. Packers, quite worried about the short fall in slaughter cattle supplies, have been managing the supply through put by controlling the slaughter pace. In other words, they’ve acted in common to slow the chain speed in an effort to prevent supplies from becoming excessively tight.
Obviously, they can’t change that fact that less cattle are available, but they can slow the kill and basically refuse to compete aggressively with each other for available supply.
This approach has allowed prices to appreciate in stair-step fashion without any short-term sharp jumps in the cash steer market. They can’t prevent the market from going higher, but they can prevent sharp jumps in cash steer prices.
The bull market, from a supply standpoint, should be intact for several more years. There’s simply no way to avoid this.
However, hand it to the beef packers, they’re very good at what they do, buying cattle as low as entirely possible and making money processing beef.
Supply is only half of the equation. Demand for beef is required to keep the bull market fully intact. For most of 2023, beef demand has been excellent on the domestic front while high prices have slowed export demand. However, there are some clear signs beginning to develop indicating that domestic beef demand is peaking.
First and foremost is the fact that the 50% beef trimmings have been trending lower for a couple of months. In fact, as of Friday, Nov. 2, the 50% beef trimmings reached a 30-month low.
Beef trimmings are the main ingredient in ground beef for hamburgers. In addition, most of the beef in the U.S. is consumed in the form of burgers. This, the 50% trim stumbling and hitting two- and one-half-year lows strongly suggests peaking demand.
There are several indicators that suggest the U.S. economy is headed for recession. These include the recent and dramatic decline in bond prices and lower trending equities. The job market is slowing as demonstrated in the recent employment report and the index of leading economic indicators is predicting recession.
Frankly, a recession with retail beef prices at record highs is going to spell problems for live cattle prices. The week ending Nov. 3, choice beef was down $5.23. This is contra-seasonal weakness. Normally late October and November is a very strong time of year for beef demand. Cutout values almost always grind higher at this time of year. But not this year.
What we know for sure is that if beef stops moving at retail, and wholesale beef starts backing up on the packer, they won’t bid higher for slaughter animals, regardless of supply. In addition, the sharp rise in September placements and the slowed marketing pace for several months has allowed the supply of cattle-on-feed for 150 days (about 5 months) or longer to increase.
In addition, I’m hearing that October placements were also above last year. In other words, in the short-term, the supply of slaughter ready animals may not be tight.
I’m projecting a recession in the first half of 2024 and a lower trending and possibly sharply lower trending cash steer market into the recession. The futures market is already in tune with this outlook. Sadly, many if not most in the industry are not in tune with this outlook.
Until recently I’ve been bullish and holding bullish cattle options and futures positions for over two years. As of this writing most of our clients are completely out of bullish positions and actively hedging.
Our hedges are focused on the first half of 2024 production. I don’t see the need to aggressively hedge production in the second half of 2024. I’m hoping the recession will be fairly short in duration although, obviously, no one knows this for sure.
Live cattle futures (December) have staged a full recovery from the drop following the bearish on-feed report. Hedging is strongly advised.
Smith is with Archer Financial Services, Inc. and has been a full service commodity broker specializing in grain and livestock trading for over 25 years. He publishes his widely read evening livestock wire daily and the report is available for a free 30-day trial, simply by emailing him here.
