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Peak Beef Supply Concerns Surface

The week's kill may have come in a little larger than the trade was expecting. The talk this morning was for a 45,000 head Saturday run. Packers will surpass that, according to the USDA, with a 58,000 head run. That puts the week's total to 641,000. This is the biggest kill of all of 2017, 2016, 2015, and 2014. You have to go back to July 20 of 2013 to find something larger. It would also be 10.7% over last year in the same week. This now makes it three weeks in a row of 8% to 11% higher than last year's numbers. Before this, the recent pace had been only 5.5% over. It is likely we will have to raise our target supply peak up from the current 655,000 head level. Our concerns about the supply situation are now coming to fruition.

Yesterday's weekly cattle weight numbers, from the kill two weeks prior, were bearish. Steer weights rose 7 pounds in the latest week and heifers were up 1. Steer weights are only 0.9% under last year now. Heifers are only 1.1% under.

The recent monthly supply/demand report was clearly bearish for beef. USDA brought the Q3 beef production estimate up from 6.815 billion lbs to 6.830. This is a minor change. This new number is 5.5% over last year. Their Q4 numbers were raised from 6.970 billion last month to now 7.165. This new number is 8.2% over last year. This is a bit rougher than we expected. For 2018 they have an odd flow, 6.325 and 7.005 billion respectively. That would be +0.4% then +9.4% respectively. We are not on-board with their Q2 2018 number. It would appear as though placements are starting to back down in recent weekly feeder sales. We would also suggest their Q2 estimate needs to see high placements continue. Given recent price declines, and our expectation for that to continue, we cannot agree.

In recent weeks, we have raised the question of whether cow/calf producers were no longer bullish. The USDA's report in July suggested they are ready to move held back heifers to the feedlot. That runs contrary to our personal conversations with many producers. "I hope prices decline these next few months like you say it will. That way I can buy them cheaper." That's a common theme among many considering replacement heifer/cow purchases.

Kansas State University's cattle feeding model implies breakeven prices for outgoing feedlot cattle at $112 for August, $115 for September, and $122 for October. Allendale forecasts cash cattle prices falling from $114 in August to $108 by October.

This week was a clear milestone for Allendale's cattle research. Every one of our cattle price targets released at the July 27 session of the last AgLeaders Conference have been filled. This was done so about two months before we see the worst of the worst of supplies. Either this market has "pre-traded" the coming bearish supply problem or the actual prices to expect in the weeks ahead will be even worse than our forecast. We don't see anything like the $97/$98 trainwreck posted in Q4 of last year. However, if this market does get too far into undervalued territory in the tough spot up ahead, we will be eager buyers for summer 2018 contracts.

We forecast August at $114, October at $108, and December at $110. For 2018, we have February at $112, April at $119, and June at $111. For feeders, we saw October down to $142 and April at $135. For calf prices, we see October sold animals at $160, currently $168, and 2018 October sold animals at $155. Those following our advice sold August cattle in the $120 to $123 range using options. We still see more pressure, so we would expect hedges to be rolled. Feed costs should be locked in via December corn options on the July 3 open when December corn was at $3.95. That was made with a limited risk December option strategy.

Rich Nelson | Allendale Inc. | 815-578-6161

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