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CME Group: Cattle Futures bullish

Cattle futures continued to build on the bullish momentum of the first days of January, and the nearby February contract settled at a contract high. 

“Futures have been buoyed in recent days by a combination of higher prices paid for cattle in the cash market and an improvement in the value of the cutout,” CME Group says. “The higher prices paid for cattle were seen as a signal that spot cash supplies are tight and packers need to bid prices higher in order to secure adequate supplies.”

However, they add that cattle prices can not be decoupled from the wholesale beef prices for too long. Eventually packers need to bring a margin back in the business and will change slaughter schedules to bring supplies in better alignment with demand. 

Weather implications

There is also continuing conversation about the impact of cold weather across the country on cattle performance and weight. Weather is always a concern this time of year so it is important to put things in perspective a bit. 

Are current conditions very different from what we would normally expect in late December and January? We would argue they are not, they say. Yes, it has been cold in many parts of the country, but cattle are fairly tough animals and can withstand the cold much better than people think. They will tend to spend more energy trying to stay warm but, in our view, cold in itself is not the enemy, CME Group adds.

Rather, it is cold combined with wet conditions that is detrimental to cattle performance. While there has been some light precipitation over Nebraska and Iowa, the overall levels have been quite small – less than a quarter of an inch. 

Beef demand

“There is another side to cold, snowy weather at this time of year – the impact it has on people and beef demand,” CME says. “We would argue that the snow storms across much of the Central U.S. and Eastern U.S., storms that will affect close to 100 million people, are a significant negative to beef demand.”

Reduced mobility is particularly negative for foodservice demand, the add.

The bottom line is that at this point the cold and wintry weather is more of a factor for beef demand rather than the supply of beef coming to market.

Market watch

“Where does the beef and cattle market go from here?” asks CME Group. “The trend in beef supplies certainly is important to watch.”

The expectation is for a sharp reduction in the number of cattle coming to market, they explain, adding that with steer weights steady compared to a year ago, overall beef production will decline by a similar amount as slaughter. 

That is the bullish case that has underpinned the cattle market since at least last summer. 

Price correlations

At this point, the surge in cattle prices has not had a corresponding move in wholesale beef prices. 

“Yes, the choice cutout is now back to $200 per hundredweight, and the select cutout is a lot higher than a year ago,” CME Group notes, “but still the numbers imply thin or negative packer margins at this point.”

The further note that what will carry the cutout in the coming weeks is particularly important. 

“The choice cutout in late October hit $205 per hundredweight, but that was because of some pent up demand when buyers opted to sit on the sidelines while USDA was closed,” they explain. “Also, we had the year-end holidays ahead of us and the normal seasonal demand.”

More recently, the cutout has benefited from a rally in the price of rounds and chucks as retailers come back in the market looking to fill the retail case with more seasonal items. Normally, the round market tends to get softer in late January and February.

Additionally, steak cuts usually are weak as restaurant demand is negatively impacted by weather and reduced corporate travel. 

“So the demand will remain the challenge for the beef market in the short term,” CME Group mentions. “The short supply premiums currently in the market could quickly go away if beef prices fail to gain ground in the coming weeks.”

This article is courtesy of CME Group.