“Cattle on Feed” …What You Need To Know To Take Action In The Futures Markets
By Steven Speck
The United States Department of Agriculture (USDA) released its monthly account of “Cattle on Feed” last Friday (7/20/2018). This report gives us a snapshot of approximately 85% of the total cattle on feed in July leaving 15% of cattle on feed unaccounted for. Nevertheless, this is still a very good indicator of where U.S. cattle production is at and help us determine price action from a supply side perspective. According to the USDA they calculate cattle on feed at 11,553 (1,000 head) as of June 1st which a 460,000 or 4% increase year to date.
Normally an increase on the supply side which the USDA has reported would make any producer worried about descending prices. Certainly, live cattle prices are not in the $130/cwt range and a 4% increase in supply, setting all else equal, would shove the August live cattle futures prices from $109.125/cwt to $104.760/cwt. Defiantly not a pretty number with August futures feeders at $153.5/cwt. Thankfully, This story is not all supply rather there is a “silver lining” in the demand side. If we look at USDA data, they report demand for beef in 2017 at 26.49 billion pounds which was a 9.69% increase from 2016. If this trend would continue even at half strength it would fully capture the 4% increase from the supply side and with some room to spare.
Connecting all the dots from above, given the 4% increase of cattle on feed in the worst-case scenario of a half strength increase in demand that would leave a .845% upward price pressure from a fundamental standpoint. Say we match last year’s 9.69% growth in demand that would give us 5.69% pressure on the upside. As a producer myself, I don’t expect us to match last year’s demand growth, rather I would suggest about a 5.8-6.8% increase in demand given the current growing domestic economy and the fact that the U.S. population is expanding. Though when we reference USDA data we see growth in demand in the months from Jan-May 18’ which are 4.22% larger than the demand in the same Jan-May 17’ time frame. This suggests that we are on pace to match last year’s growth of 9.69% if not outpace it.
Should it be the case that we match last year’s demand growth this suggests a price target for August live cattle futures of $115.334/cwt (5.69% increase factoring out the 4% increase in supply). My guess of where the market is as a producer, before being checked by data, was wrong proving the need for in-depth analysis of market fundamentals. My guess would have produced an August live cattle futures price range around $111.089 – 112.181/cwt. This would be equal to a 1.8% through a 2.8% upward move factoring the fundamentals. That being said, technicals will fluctuate the market around the target price as market players try to get their desired price.
When we pull up the CME Group August live cattle futures chart we can see price discovery trending toward $115.334/cwt price. What should be noted is the dynamic movement seen which could be attributed to technicals playing in the market.
The Cattle Crush, market information applied
The cattle crush is a futures market simulation of the feeding process of cattle. It provides insight into margins and profitability of the cattle feeding process. That being said, it is not an exact replica of the process and does not account for variability in feed rations, miscellaneous expenses, or death losses.
Current cattle crush:
- Using a 6-3-2 ratio based off a CME Group example. For Dec live cattle, Aug feeders, Sep corn with current prices as of 7/20/2018
- $8670/trade or $.217/cwt live cattle or $.1734/cwt feeder cattle
This is included last in the article as the United States is a net importer of beef as well as the largest producer of beef in the world meaning if say Mexico doesn’t accept U.S. beef it would have an effect but should not be to the same degree as we see in the soybean market. When we look at the top export destinations for U.S. beef according to the National Cattlemen’s Beef Association we find the following top five export markets as of 2016:
- Japan: 258,653 metric tons; $1,510 million
- Mexico: 242,373 metric tons; $975 million
- South Korea: 179,280 metric tons; $1,059 million
- Canada: 116,266 metric tons; $758 million
- Hong Kong: 112,770 metric tons; $684 million
This would bring in potential NAFTA negations as Mexico and Canada are large destinations for U.S. beef. We note the new Mexican president who wants to work with the United States over NAFTA and the fact that the U.S. is the economy of North America to establish the idea that at the current moment the market should not worry too much about tariff talk.
To look at the Cattle on feed report click here
To check out demand data from the USDA click here
USDA, National Agriculture Statistics Service. (2018). Cattle on Feed (July 2018).
USDA, National Agricultural Statistics Service (2018). Livestock Slaughter and Poultry Slaughter (June 2018).
National Cattlemen’s Beef Association (2018). Industry Statistics (2018).
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