Tightening Cattle Supply

Ben DiCostanzoGeneral Commentary

In my view the packer continues to show they are worried about cattle supply. It has been my experience that they don’t pay up unless they have to. They are showing they have to pay higher prices to get needed numbers to slaughter. Fed cattle slaughter has been moving higher as a percent of total slaughter as cow slaughter has dropped. They are lucky feed costs have fallen, in my opinion as it has allowed feedlots to keep cattle in their yards longer to get them to weights needed for the packer. I remember in 2018 – 2019 when producers were getting stiffed because of high cattle supply and the packer could sit back and say I have enough cattle to go to slaughter but I will buy your cattle at such and such a price lower than what they were paying for the cattle already bought. The producer worried about getting docked for having too heavy cattle weights, would usually give in to the packer demand. So, in my opinion the worries that some have over extended stay in feedlots and resulting heavier cattle are over blown. Packers are demanding cattle to be heavy and I have been told by producers that when the cattle have been sold to the packer, he would say feed them longer they are too light…. This is with their weight at over 1,400 pounds. Like I said earlier, with feed cost low, the producer was happy to comply with the packer request. 1,400-pound cattle too light, wow… This shows, in my opinion the tight supply the packer is up against. With cow slaughter down and the need for more fed cattle to be slaughtered, they need the increased weight to provide them with production to meet their orders. Without the rise in weights, cutout prices would reach levels that would really price the consumer out of the market. Demand will be destroyed and the packer would suffer even more in the long run from the consumer finding other alternatives. I feel this has caused the packer to lose control of both sides of the market that they dominated for so long. The retailer has been focused on getting enough ground beef and has focused on select cutouts to help provide supply with the cow slaughter down and has left the packer to keep choice levels from surging. They are getting more prime and choice cuts with the added weight and with the decline in select has seen the choice/ select spread narrow from its high levels. With cutouts still under last year’s peak prices, consumers are seeing beef features and even though prices are slightly above last year are still eating beef in healthy amounts. The focus on select has kept the choice component in the consumers price range. They seem to be willing to pay a little more for beef. But they have moved away from the high-priced premium products. I believe beef demand could remain strong for the summer and I believe cattle numbers will not materially increase during the summer months. Calf feds, which usually are lighter at sale are coming to town and they could bring down weights slightly and the summer heat could hinder performance also.

Packers are not in a position to back off, and have been getting more aggressive in the cash market. They are really aggressive in the north where supplies are weakest. The south, especially Texas have not participated in the surge, but that could be changing. Kansas has seen cash prices move higher and Texas may finally be getting the message and wants to participate in the rally. Cash has been quiet this week in front of the Cattle on Feed Report but we have seen some early cash trade in Texas at 188.00. The report is expected to show lower on feed numbers than last year which could keep the pressure on the packer. What happens when the supply gets really tight and the packer has to go toe to toe to get supply? Rationing will take hold as price could get bid up to ensure the packer has enough product, in my opinion. They can no longer sit back and allow supply to come to them. They are going to have to compete with each other. This could lead to even higher cash prices and Texas may even benefit. This could spark a rally in the futures market, especially if Texas can see the light and demand higher prices for their cattle. They have been the so-called low-lying fruit that the futures market has followed, in my opinion. Go Texas, it’s time to join the fray!

Trade Ideas

Futures-N/A

Options-Buy the at the money August live cattle 183 call. Sell the February 25 live cattle 2.00 call. Enter into the spread at a 20 point or $80.00 collection minus trade costs and fees.

Risk/Reward

Futures-N/A

Options-This option diagonal has unlimited risk. We however suggest a sell stop loss GTC at -100 points. Risk is 80 points or approximately $320.00 plus trade costs and fees. We think August can trade up to the 188/189 area which puts the long call deep in the money. We suggest exiting should this occur. This is just one idea we have to take a long position on the cattle board, not THE way. Please contact us if interested.

The Feeder Cattle Index increased and is at 257.47 as of 06/20/2024. 

Boxed beef cutouts were lower as choice cutouts decreased 0.48 to 322.39 and select decreased 1.29 to 303.11. The choice/ select spread widened and is at 19.28 and the load count was 131.

Friday’s estimated slaughter is 120,000, which is above last week’s 119,000 and last year’s 119,724. Saturday slaughter is expected to be 19,000, which is above last week’s 7,000 and below last year’s 25,193. The estimated slaughter for the week (so far) is 620,000, which is above last week’s 615,000 and below last year’s 649,478.

The USDA report LM_Ct131 states: Thus far for Friday in the Southern Plains negotiated cash trading has been mostly inactive on light demand. Last week in the Southern Plains live FOB purchases traded at 186.00. In Nebraska and Western Cornbelt negotiated cash trading has been slow on moderate demand. In Nebraska, a few dressed purchases have traded from 310.00-312.00. However, not enough dressed delivered, or live FOB purchases for a full market trend. Last week live FOB traded early in the week at 190.00, with later in the week purchases ranging from 195.00-198.00, while dressed delivered purchases traded from 305.00-306.00, with a few up to 310.00. In the Western Cornbelt, a few live FOB purchases traded have traded at 197.00. However, not enough live FOB or dressed delivered purchases for a full market trend. Last week live FOB purchases traded from 190.00-197.00 mostly from 193.00- 195.00, dressed delivered purchases traded from 305.00-306.00 with a few up to 310.00.

The USDA is indicating cash trades for live cattle from 188.00 – 198.50 and from 305.00 – 312.00 on a dressed basis (so far).

United States Cattle on Feed Down Slightly

Cattle and calves on feed for the slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 11.6 million head on June 1, 2024. The inventory was slightly below June 1, 2023.

Placements in feedlots during May totaled 2.05 million head, 4 percent above 2023. Net placements were 1.98 million head. During May, placements of cattle and calves weighing less than 600 pounds were 395,000 head, 600-699 pounds were 315,000 head, 700-799 pounds were 485,000 head, 800-899 pounds were 531,000 head, 900-999 pounds were 230,000 head, and 1,000 pounds and greater were 90,000 head.

Marketings of fed cattle during May totaled 1.96 million head, slightly above 2023. Other disappearance totaled 62,000 head during May, 16 percent below 2023

For those interested I hold a weekly livestock webinar on Tuesdays and my next webinar will be Tuesday, June 25, 2024, at 3:00 pm. It is free for anyone who wants to sign up and the link for sign up is below. If you cannot attend live a recording will be sent to your email upon completion of the webinar.

Sign Up Now

**Call me for a free consultation for a marketing plan regarding your livestock needs.**

Ben DiCostanzo

Senior Market Strategist

Walsh Trading, Inc.

Direct: 312.957.4163

888.391.7894

Fax: 312.256.0109

bdicostanzo@walshtrading.com

www.walshtrading.com

Walsh Trading, Inc. is registered as a Guaranteed Introducing Broker with the Commodity Futures Trading Commission and an NFA Member.​
tested support at the
Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.​

All information, communications, publications, and reports, including this specific material, used and distributed by Walsh Trading, Inc. (“WTI”) shall not be construed as a solicitation for entering into a derivatives transaction. WTI does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.