April 28, 2022
Cattle futures spent the first few months of 2022 in an uptrend, with prices recently seeing a large setback. Traders cite potential demand failure due to inflation spikes, along with a short-term supply influx as the culprit for lower prices.
So where to from here? Is this setback an opportunity to get long in the market? Or is a further price dip lower coming?
A look at supply fundamentals
The recent Cattle on Feed report shocked many as numbers were higher than expected for the second straight month. Total cattle on Feed totaled 12.1 million head as of April 1, 102% of last year, and above market expectations. This was the highest April 1 inventory since data was kept starting in 1996. Placements last month were at 100% of last year, and also well above expectations. Marketing totals were in line at 98% of last year.
With the April 1 cattle inventory the highest on record, the market needed to balance the new supply picture, hence this week’s gap open lower on daily charts for all 2022 futures contracts. As the week continued, additional technical selling occurred. But this recent sell off may be just what patient buyers have been waiting for.
If you turn your attention to recent cash trade, prices have actually been surprisingly firm. The cash buying pattern has had a similar pattern for the past 4 weeks. Packers pay up for bigger heavier Choice and Prime cattle in the Midwest and pay less for cattle in the Southwest. For example, cattle in the Midwest sold Tuesday this week at $145.00 - $147.00, while cattle in Kansas and Texas sold for $139.00 to $140.00.
This firm tone for cash cattle may actually limit further downside futures contract selling, although the hefty Cattle on Feed numbers may limit enthusiasm for a major rally for now.
Taking a slightly different look at the supply picture, the recent USDA cold storage showed some slight product build as total pounds of beef in freezers were up 1% from the previous month and up 11% from last year. This reflects the above average carcass weight being processed, along with additional head coming to market, thus adding more pounds into the cooler.
For the short term, this would suggest further evidence of sufficient supplies, which might keep front month cattle futures prices in check for now. However, with grilling season near, and retailers likely beginning to think about ordering for Memorial Day weekend, I have a sneaking suspicion that demand will pick up soon and eat into those supplies.
Demand is not wavering
U.S. beef exports posted another strong performance in February, according to data released by the USDA. Key buyers have been China, South Korea, Japan and Latin America. Beef exports totaled 108,501 metric tons (mt) in February, up 5% from a year ago. Through the first two months of the year, exports increased 9% to 227,567 mt.
Domestically, beef demand remains strong and is likely to gain strength into the summer grilling season. Sure, many economists are chattering that with inflation and high price gas prices, that beef demand will fall. To which I say, “wrong.”
Back in 2014 the U.S. was still slowly emerging from the recession, and live cattle futures were trading between $140.00 and $170.00 while crude oil futures for most of that year were between $100.00 and $107.00. Pocketbooks were tight for many American families during that time.
For an entire year, I was convinced that demand for beef would drop due to high prices, and U.S. families would switch to tuna noodle casserole to save on costs. I was wrong, and beef demand stayed firm.
No substitute for beef
What ended up happening in 2014, was the grocer packed thinner cuts of steak and smaller packages of hamburger. The consumer still bought beef. Taco Tuesday, family spaghetti night, and fast-food hamburgers continued to rule the appetites of Americans. Beef! It’s what’s for dinner!
So yes, the recent Cattle on Feed Report was bearish but you need to remember, the beef cow herd liquidation is nearly at a record pace right now due to higher priced feed and poor pasture conditions. Looking forward, there will be fewer replacement feeder cattle as markets heads into last half of 2022 and into 2023 and beyond.
Short term reality is that front month cattle futures will likely continue to reflect the ebbs and flows of cash trade, which for most of this year has hovered between $135 and $140. However, those deferred 2022 live cattle and 2023 cattle future contracts remain of good value from the primary reality of less head of cattle available down the road, due to herd liquidation now.
Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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