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Analyst: The Worst Is Yet to Come for Cattle Market

The monthly Cattle on Feed fulfilled its bearish promises. USDA counted 12.2% more placements than last year in May. That was over the 10.4% increase the trade was expecting (ALDL +14.0%). At 2.119 million head, it was 230,000 head larger last year. Placements have been running at a good quick for some time, higher than last year in six of the past seven months. Over the past seven months they have added 1.324 million head more than last year. May placed cattle are ready for slaughter from November through February. The bearish fall supply is already set in stone. Now, we are working on extending this problem into the end of the year.

The number of finished cattle leaving feedlots in May totaled 8.8% over last year. That was just over the average +8.5% guess (ALDL +8.1%). This marketing number was artificially inflated by 4% as there was one extra weekday in May 2017 vs. 2016. With the placement and marketing numbers mentioned, and including the never-mentioned fourth category called other disappearance, the number of cattle on feed as of June 1 totaled 2.7% over last year. That is an increase over the 2.0% higher number posted May 1.

There are various calculations that we can do to off these numbers. One of them is a calculation of cattle that have been in feedlots for over four months, a measure of marketing currentness. We calculate there are 3.566 million head as of June 1 that have been in feedlots for over 120 days. That is 9% fewer than last year. That sounds bullish, but let’s not forget this same calculation was 16% smaller on March 1 and 15% smaller than last year on April 1. There has been a measurable change in the feedlot population. You can bet this will continue to worsen into fall. Within three months’ time, we will likely be over last year in this metric.

The charts still show the double-top formation on the August contract. It implies pricing down to 106.00.

We are not going to get bullish about the recent USDA suspension of Brazilian beef imports. After seeing an 11% rejection rate on recent shipments from Brazil, U.S. authorities enacted a ban on all fresh beef from them. The normal rejection rate is around 1%. USDA officials suggested a high rate of abscesses and unidentified foreign material. Brazils ag minister is planning a trip to the U.S. to try to push for a lifting of the suspension. The reason we don’t call this clearly bullish is that imports from Brazil, of all types of beef, total only 5% of our import total.

Thursday’s Cold Storage report was great to see. End of May beef stocks at 412.87 million tonnes, were lower than the 438.6 average trade guess (ALDL 436.348). We drew down 46 million in stocks last month, the biggest May drawdown ever.

On Thursday, Chinese authorities announced they accepted the first load of U.S. beef in 14 years. We hope to see this grow in the coming weeks and become a market-moving issue in a few months.

This market had so many weeks of winning, on the bull side, that current pricing is almost shocking. Cash peaked at $144/$145 seven weeks ago. This week’s low price was $119. That is the lowest since the first week of the year. Given the fact that we have not even started to get into the rough patch waiting for us from late July through the end of the year, it won’t be hard to say we really have not gotten anywhere into the worst of things. This call will come a few months from now. Our $114 to $117 call for the August contract is likely a bit too high. We remain bearish and will hold the $120 to $123 hedges advised in the first seven days after the main market peak on May 4. We will strongly advise producers following this plan to hold those hedges until the cattle are sold.

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

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