CME: Livestock Markets Remain Volatile

US - Livestock markets remain quite volatile. Fed cattle futures are searching for a bottom while hog futures have taken a bit of a breather after the 35 per cent slide since June, according to the latest Daily Livestock Report published by Steiner Consulting Group.
calendar icon 17 October 2016
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On Thursday USDA reported average steer weights at 909 pounds, about 5 pounds heavier than the previous week. But these are weights for two weeks ago. Our estimates show that steer weights for this week are around 913‐914 pounds so expect further gains in the next couple of reports.

Cattle slaughter is running above earlier estimates as packers capitalise on excellent margins. Beef demand has been somewhat problematic, especially with regard to some of the cheaper beef items. Middle meats, which helped carry the carcass over the summer, are showing some weakness.

Seasonally steak cuts improve into year-end but the outlook for ground beef is uncertain. While lower prices for competing meats may be negatively impacting the ground beef market, we think that foodservice weakness is more of a factor.

Restaurant data so far has been extremely disappointing, especially customer traffic.

Lean hog futures have rebounded modestly, with the biggest gains in the October contract that is going off the board today and some of the deferred contracts.

There is still a lot of uneasiness about December lean hog futures and despite the recent modest rally there are plenty of concerns about packing capacity compression later in the year.

Weather disruptions in North Carolina have limited slaughter this week but the hogs that did not come to market did not disappear, they are still there and will show up in large slaughter levels in the next two weeks. As always, keep an eye on those hog weights and what they tell us about producer correctness.

And in following up with our discussion about meat protein expansion, we thought it would be useful to once again revisit the nexus between livestock and corn prices. Feed is one of the key variable costs for livestock and poultry producers and shifts in feed costs eventually lead to shifts in the supply/price of animals.

Now this is not instantaneous and the lags can go from a few months to a few years. However, over time the ratio of livestock prices to the price of feed provides some indication as to where the industry is heading.

Take fed cattle values. Since the early 1990s the long run trend of the fed cattle/corn ratio has been around 30. When ratio increased significantly above that it would signal that producers were more than able to cover variable costs and eventually lead to expansion. The increase in supply would then pressure prices lower and the ratio would tend to return towards its longer term level.

Corn prices escalated in 2007 as more of the corn supply went into ethanol production. At those levels fed cattle values were simply too low and indicated further supply compression was needed to bring markets back in balance.

In 2006 fed cattle prices were in the mid-80s but analysts were starting to discuss the possibility of corn prices going from around 2.50 to $3.00 to $4 or higher. A cattle/corn ratio of 30 with $4 corn implied fed cattle in the $120 range, which back then was unthinkable.

Instead corn prices pushed as high as $8 and eventually we got fed cattle to hit $170. Current corn prices are hovering around $3 to $3.50 per bushel and futures are now pricing cattle at $90 for next summer, bringing the feed/cattle ratio back to the long run trend. But is $3 corn sustainable going forward, that is a key question going forward.

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