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Surprisingly Bearish Cattle on Feed Report

Packers may regret their role in bidding up for cash cattle today. Sales were seen at $108 in the South and $109 in the North today before the 2 p.m. Cattle on Feed (COF) report. Those prices were $2 and $3 higher than the previous week.

Today’s Cattle on Feed report is a bearish surprise. USDA’s monthly survey of feedlots found 2.6% more placements in the month of August. That was a clear surprise against the trade expectation of a 2.1% decline. It was higher than estimates from nine of 10 analysts submitting estimates (ALDL -7.1%). For those asking how we all, including Allendale, missed these numbers, the math is easy. Most of the industry starts with the known sale barn numbers. This data is factual. But not all calves and feeders enter the feedlot through a sale barn. Many go right from the home farm to the feedlot. Guessing those numbers is the difficult part. To a minor extent, fluctuations in monthly imports can also slightly change the numbers. August placements determine a part of February-through-June slaughter. The number of cattle marketed in August, those finished with their feedlot visit, came to 5.9% over last year. This was right next to the 5.8% trade estimate. With a placement surprise, the number of cattle in feedlots as of September 1 totaled 4% higher than last year.

The bearish COF report was also combined with a bearish Cold Storage report. USDA reported 476.260 million pounds of beef at the end of August. That was far over the 426.5 average trade guess (ALDL 435.7 + one other analyst 403.4). This 44-million-pound increase from the previous month was the largest August beef stocks increase in 15 years.

The dominant live cattle contract, December, exactly filled that remaining upside gap up to 117.72. It filled it exactly today.

2016 vs. 2017 Cash Cattle

In 2016, the cash cattle was in a free fall from the March peak of $139 to the October low of $98. That free fall had a few minor bounces along the way. The last was a one-week bounce from September 9 to 16. Prices went from $105 to $109. After that one-week bounce to $109, prices went right back to the $98 low. This year’s peak was in May at $144/$145. Two weeks ago, the preliminary bottom was made at $105. Last week ran $106, and this week was at $108. Was this week’s higher cash cattle price simply a fake out like last year?

2016 vs. 2017 Cattle Futures

Last year’s December cattle futures posted a rebound from September 6 to 22 before pushing back to new lows until October. That bounce totaled 5.4% from low to high. This year’s low was made on August 18. Through today’s high, the rally has run 10.3%. The size of the rally does seem a little too large for a valid comparison against last year. The general time frame for the rally, though, is close.

Even without the bearish COF report, we have been skeptical about a bottom for cash cattle. Over the past four weeks, free-market cattle sales to packers ran 91,000 head fewer than last year. We would guess this week would represent five weeks in a row of cattle feeders holding back numbers. Expect futures to start off $1.25 lower on Monday. We still suggest lower prices into October is the word. Our forecast is $108 and $110 for expiration on the October and December. We will discuss long-term buys in a few weeks. 

 

Rich Nelson
Allendale Inc. 
815-578-6161

This material has been prepared by a sales or trading employee or agent of Allendale Inc. and is, or is in the nature of, a solicitation. This material is not a research report prepared by Allendale’s Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

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