Posted On: 06/16/2016
By Cassie Fish, http://cassandrafish.com
Another day, another 100 points lower. CME cattle futures stubbornly and methodically have made new lows for the week again. Feeders are losing to fats and have made new contract lows, as the realization grows that there is nowhere else for a cattle feeder to claw back margin except buying feeders cheaper.
Today’s decline in futures pales in comparison to what is occurring in the cash fed cattle market this week. It has been a dramatic collapse. From a few cattle that traded earlier this week at $125 to $119 this morning, negotiated prices were $3 and are now $9 lower than a week ago. At least for today, the basis is narrowing a tiny bit by virtue of cash breaking faster than the board- though it is still wide.
There are only a couple of packers in the hunt this week and less competition is a pressuring factor. A few more captives, a few more cattle bought with time and packers are able to fill the remaining slots more easily. Most cattle feeders are doing all they can in difficult circumstances, selling cattle green in some instances, to stay ahead or at least in step with marketings.
This week’s kill is expected to be 590-600k and packer margins are +$100 per head. June beef demand has been excellent, the performance of the middles exceptional- both contributing to better than expected pack margins this month. There are widespread, cheap beef grilling features advertised for Father’s Day weekend. The cutout did make its seasonal top this week and will lose as much as $10 over the next several days. With cash cattle prices dropping as dramatically as they are that will keep margins black and kills up.
Kill levels in July and August 2015 were too small, ranging from 532k to 556k. This year the industry will continue to exceed year ago kills by 25k-50k per week the rest of the summer, as it has since March.
There has been discussion about how low the cutout would have to go this summer to equal what live cattle futures are portending. That analysis seems to be assuming that packer margins would resemble the past not what they are today. The packing industry was forced to make massive cuts in slaughter capacity to survive the lowest cattle numbers in modern history. Now as cattle numbers slowly increase and beef demand is stimulated by greater production and lower prices, the packing industry is recouping losses at the expense of the cattle feeder.
Some may wonder why the packer doesn’t’ run more hours with margins so wide, but the packing industry lost hundreds of employees over the last several years when running reduced hours was required to survive. It is tougher to ramp back up than to wind down. At some point, of course, the packing industry will begin to add staff but they too must gauge the pace of expansion in cattle supplies.
Both the cattle and beef packing industries are in a state of transition from operating with extremely small supplies to slowly expanding greater supplies. Part of today’s challenges are very much related to this “big picture” shift. No doubt market participants have been intimidated and frustrated by the change in the way CME cattle futures trade and there have been other issues at play as well that have contributed to a very difficult market environment in 2015 and 2016. Today though, the core issue of throughput and competition for supplies is a dominant one.