Slaughter off to Slow Start Raising Perplexing Questions

Fed cattle slaughter refuses to rise to meet most analysts’ expectations despite positive packer margins. Monday’s kill was revised down to 113,000 head, yesterday came in at 118,000 and now predictions for this week’s slaughter have dropped from 610,000 or higher to 600,000-605,000.  But why?

Theories include that there simply aren’t enough market ready cattle to easily kill more now, and last week’s plummeting yield data seems to support that assertion. Another is that packers, after closing quite a few plants, have smartened up in recent years and unless aggressive consumer demand warrants it, would rather “balance” input and output at an acceptable plus margin than reach for more.

Thus, the fact that the kill has yet to ramp up to expected summer levels of 620,000 plus does not seem to be backing up cattle. The question of great interest is when do these smaller kills become problematic? Or do they ramp up in the nick of time? At this point, it appears rather indisputable that the increase in fed cattle supplies for 2014 are loaded in the third quarter. Anecdotes and math seem to support that fact.  How the market handles this increase is the key to success the next 3 to 4 months.

            Big YTD Beef Imports Continue; Australia the Leader

In the meantime, imported beef from Australia continued to pour into the US, and supplant domestic fed end cuts for the ground beef grind. Year to date, AUS imports are up 26.86% and total beef imports YTD up 6.34%.

            Futures Trading at Top of Recent Trading Range; OI Builds

Someone has made some big bets this week in live cattle futures. Open interest has increased in LC futures over 10,000 contracts since Monday as futures have pushed to the top of the trading range established in the last 2-3 weeks. Maybe Friday’s commitment of traders report can shed some light to see if money managers are getting long or commercials.

The wide basis continues to be a supportive factor as well as new all-time highs in feeder cattle futures once again. On the other hand, a long summer stretches ahead and domestic beef demand appears to be adequate, but nothing more, in spite of historically small production. Maybe a big swingy chop, sucking traders into buying rallies and selling breaks is our most likely scenario for the time being.

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