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In This Issue:
Identifying major trends  in slaughter figures can help you form a fundamental bias toward steer prices. Get tips from Dennis Smith.
November 29, 2007
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Taking A Walk Though The Beef Fundamentals

The USDA provides a host of fundamental information, making it possible for anyone to analyze the live cattle market. Most of the information is devoted to the supply side of the beef market with demand side information much more difficult to find.

The two most important supply factors to watch are slaughter data and average weight data. The USDA provides daily slaughter data, released just after the close of trading. The report typically provides a comparison of daily slaughter from the previous week and the same day one year ago. On Fridays, the slaughter report provides year-to-date totals making a comparison perhaps more meaningful as we work through the year. Of course, identifying the major trend in the slaughter figures, and thus the production trends, can help a trader form a fundamental bias toward steer prices. Knowledge of the seasonality of beef slaughter is important. For example, cattle slaughter tends to increase in the spring and summer to coincide with improving demand during this timeframe.

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The location of the cattle can be an important consideration, especially in the winter months. The beef industry typically bunches cattle up in feedlots located in the Great Plains. Huge numbers of cattle reside in Nebraska, Kansas, Texas and Colorado. Harsh winter conditions don’t usually impact the numbers of cattle in the feedlots (referred to as cattle-on-feed, but it can have a major impact on the average weight of cattle. For example, harsh winter conditions that persist for a period of weeks can actually cause cattle to lose weight rather than gain weight. This tends to alter the movement of cattle out of the feedlot (referred to as marketings), disrupting the production of beef and thus impacting prices. In this case, a sustained period of harsh winter conditions would actually reduce the beef tonnage available to the marketplace and likely result in higher prices.

The second important component of supply (mentioned above) is average weight data. Weight data is provided weekly by the USDA on Thursday mornings. This report shows the actual slaughter for the previous week (the daily slaughter figures are estimates) and also provides actual weight data compiled as the cattle are slaughtered. Again, weight data is constantly compared with week-ago and year-ago figures. Several factors determine the average weight of cattle sent to slaughter, such as the length the animals spend in the feedlot, weather conditions and size of the animals when they entered the feedlot. However, another important factor contributing to the average weight of slaughter cattle is the attitude of the cowboys or the feedlot owner/operator. More clearly, if the industry is typically “bullish in their attitudes” then cattle are typically fed to heavier weights. In my opinion, the overfeeding of cattle resulting from bullish attitudes in the industry represents the single most bearish fundamental a trader can watch for. Trader’s tip: when trading live cattle futures, always be aware of the average cattle weights and whether such weights indicate a bullish attitude in the country or a bearish attitude. Excessive cattle weights, if they persist long enough, can singlehandedly wreck a bullish cattle market. The situation typically occurs during periods of very cheap feed prices but can also occur if large numbers of cattle are placed (moved into the feedlot) at heavier weights, in periods of very mild weather conditions and in a situation in which the futures board is trading at a sharp premium to the cash market.

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The third most important piece of fundamental supply data is placements of cattle. Placements refer to the number of cattle actually “placed” into the feedlots during a given month. Cattle are moved from grazing land, typically grass pasture, and placed into the feedlot to begin a high-protein ration or diet, thus, the term cattle-on-feed. Placements are calves that weigh from 500 lbs to 850 lbs. Typically, most cattle are placed in the feedlot when they weigh from 700 to 800 lbs. The trend this year, with corn prices at 10-year highs, has seen placements skewed heavily toward the heavier weights in an effort to minimize the length of time the cattle are in the feedlot consuming high-priced corn. The old rule of thumb is heavy in and heavy out. In other words, when cattle are placed in the feedlot at heavier weights they tend to come out of the feedlot at heavier weights. This appears to be the case this year with average dressed steer weights running record high. Cattle placement numbers are reported each month in the USDA cattle-on-feed report.

The other component of the cattle-on-feed supply is the marketing rate. Marketings represent the number of cattle moved out of the feedlot in a given month. Usually these are animals sent to slaughter, but it could also comprise cattle moved back onto grazing pastures. Marketings, like placements, are reported each month in the USDA cattle-on-feed report. Thus, cattle-on-feed from the previous month, plus placements of animals into the feedlot, less cattle marketed during the month leaves one with the latest cattle-on-feed inventory figure. These figures are normally reported as a percent of last year. For example, the November cattle-on-feed report indicated that total cattle-on-feed stand at 98% (down 2% from last year), placements at 112% and marketing at 106%.

Information on the demand side of the beef complex is much more difficult to obtain and interpret. The USDA provides information daily on boxed movement and provides a value of the beef carcass. A box load of beef represents 40,000 lbs of beef, which in the old days represented one car (rail car) shipment. The beef is cut into the main primal cuts and boxed for shipment. I like to compare weekly volume totals to get a better handle on the demand of beef at current price levels. Typically, beef demand increases into the spring season and peaks from April to June. Beef demand then turns rather weak during the hot summer months before rebounding in the fall. The beef is reported as choice cutout values and select cutout values. Much of the beef we purchase in the grocery stores is actually select beef. Nearly all of the beef consumed at the restaurant level is choice beef. Export data is much more difficult to obtain in a timely manner. The USDA compiles and reports monthly export data, but the delivery of the information is delayed by over two months. Tracking the boxed beef volume and choice cutout price is the best way to monitor trends in beef demand. Trader’s hint: after tracking the beef market for years, I’ve found that keeping an eye on price trends in the 50% beef trimmings market can be a reliable indicator of the next move in the choice beef cutout. In many cases, the beef trimmings market will change direction from 2 to 5 days prior to the choice beef cutout value.

Fundamentally, it’s my opinion that beef supplies will be increasing by the middle to end of December. I’m expecting a continuation of active placements of cattle into the feedlot for the remainder of this year, increasing the supply of cattle-on-feed. If winter feeding conditions are not severe, I’m expecting excessive supplies of beef to drive prices lower this winter. The result likely will be a test of the summer lows in February and April live-cattle futures.

About Today's Author:

Dennis Smith
Senior Account Executive, Archer Financial Services, Inc.

Dennis Smith has been a full service commodity broker specializing in grain and livestock trading for over 20 years. Dennis has a wide range of customers, many of whom are grain and livestock producers. Dennis develops and helps execute hedging and speculative strategies in his Daily Livestock Wire which is prepared each afternoon exclusively for his customers. Dennis grew up in Central Illinois before launching his brokerage career.