The next USDA Cattle on Feed report will be released this Friday afternoon. This monthly report will shed light on the current size and trends for the U.S. cattle herd.
With poor pasture conditions and high feed costs, many cattle have come to market in recent months. This has kept production current and supplies ample. Thankfully both domestic demand and global demand consumption has been keeping pace with the additional production.
Strong signs of demand
Despite inflation domestic beef demand is actually quite strong. The choice/select spread is still trading wide near $25 to $26, which reflects the tightness of the beef lots and shows packers bidding up to find choice beef product to meet consumer demand. This also suggests that demand for retail beef has not slipped in spite of higher overall costs for steaks at the grocery store.
Also, a great sign of demand strength stems from our U.S. export market. As of the August 11 weekly export sales report, cumulative beef export sales for 2022 are at 790,900 tons, up from 784,000 last year at this time. This is actually the highest on record for this time of year, with much of our beef being exported to Japan, South Korea, Taiwan, and China.
Even more good news, demand is strong despite current large supplies and overall large beef production. Looking back, for most of 2022, the increased production for front month contracts has kept futures prices in a modest range where $130 has been solid support, with $142 as major overhead resistance. For nearly eight months, nearby prices have been trading in that consolidation pattern as the balance of abundant supply being met with continuous demand.
The here and now
Now as we head into the remainder of third quarter, much of that additional supply has been anticipated and priced into the market for now. Third quarter beef production is expected to be up 2.5% from the same period last year (this is priced into the market). This production number could be even higher if the active cow and non-fed cattle slaughter were to continue as slaughter rates have been trending higher.
While the number of cattle coming to market is large, due to higher feed costs or lack of feed in some instances, weights have been trending lower.
The estimated average dressed cattle weight last week was 812 pounds, down from 813 the previous week and 820 a year ago. The 5-year average weight for that week in August is 821.8 pounds. So you can see that weights are definitely trending lower. Yet, because slaughter numbers are up, estimated beef production last week was 524.5 million pounds, up from 520.3 million a year ago.
Looking ahead – short term and long term
Industry chatter has most traders eyeing and talking about the bullish lack of supply story heading into fourth quarter and into early 2023. Fourth quarter beef production in 2022 is expected to be down 5.1% from last year, first quarter 2023 production is expected to be down 6.8% from 2022, and second quarter production is expected to be down nearly 8.0% from year ago levels.
The supply story is supportive, yet for the short term, for the most part, this friendly news is already priced into the market for those deferred contracts. Most deferred contracts (December 2022 through April of 2023) are trading above $150 for futures prices with the April of 2023 contract pushing upward to $160.
On Friday afternoon at 2 p.m. central time, USDA will release the Cattle on Feed report. Recent Cattle on Feed reports have been supportive to deferred contract prices as the number of cattle coming to market in the short term has been significant. With fewer cows being kept back for breeding purposes, this ultimately means less cattle for the future.
The market is already anticipating friendly numbers overall for Friday’s report. Heading into the report, the average estimate for the August 1 cattle on feed number is averaging near 100.8%, with a range of expectations of 100% to 101.1%. Pre-report estimates for placements are at 98.9%, with a with a range of 96% to 101.3% of a year ago. The marketing estimates are averaged near 96.6% of a year ago.
Keep in mind, trade is already expecting supportive or friendly news heading into the report, which has helped to push futures prices higher this week. What does that mean for you? Likely, that means, that for the short term, in order for prices to trade higher, the market needs to receive an “over the top friendly/bullish” Cattle-on-Feed report on Friday. If we do not receive that “over the top bullish” report, futures prices might be at risk of a short-term price correction.
What do seasonals imply?
The cattle market still looks strong overall, yet be mindful that seasonally, both the 5-year and 15-year seasonal tendency for the October live cattle contract suggest a short term price back starting on/near August 22. This price set back has a tendency to continue until on or near Sept. 6.
As of this writing, the nearby October 2022 futures contract is trading near $146.00 with the contract on Wednesday of this week able to fill the price gap higher which was left on the daily chart from April 25.
It will take significant friendly news to justify prices to leap over that short term resistance area in the October futures contract of $147. A pull back lower could take prices down to the $142 area where large support, in the form of a web of important moving averages, would act as a price catch point.
There is no question that the overall live cattle story is still friendly as cattle supply is tightening. The cash market is strong and the demand for retail beef has not slipped as anticipated. Yet, prices may be searching for a short term top. Consider using this recent price strength to build put protection under prices and keep price flexibility open to the top side.
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