The recovery that occurred in cash cattle prices from last October’s low of $98, to the spring high of $145 was a record. The rally lasted far longer and went far higher than even the most bullish analysts had anticipated. But sadly, last week’s near $9 break in the 5 Area steer price took out several layers of support, and looks to be confirming a seasonal top, and early sales this week have been a couple dollars lower. The market’s focus now is on pricing in a seasonal summer low. Based on increased feeder cattle supplies and larger on feed totals, the CME is pricing in a further decline through the summer, with even lower prices offered today for the 4th quarter. The CME has repeatedly been too bearish bearish, with June being the first contract since last October that has not rallied in the days before expiration.
From a fundamental perspective, fed cattle numbers have been larger all year, but while slaughter rates have increased, carcass weights have declined as strong basis has pulled supplies forward. Cumulative beef production for the year has been 4% larger than 2016, and that trend is expected to continue into the end of the year. The latest USDA forecasts project 3rd quarter beef production increasing 5% over last year to 6,770 Mil Lbs, while 4th quarter production is estimated 3% over a year ago at 6,800 Mil Lbs. But while US supplies are expected to increase on larger production rates, the USDA projects that the US will be a net beef exporter in the last half of the year, with imports dropping 8% to a 4 year low, and LH 2017 exports to be up 4% and record large.
The latest per capita estimates for the 3rd quarter from the USDA put US disappearance at 14.4 Lbs. This would be a 3% increase over last year and the largest since 2012, but still a historically tight domestic supply total. Based on the USDA’s per capita forecast, the price model featured in the chart projects a 3rd quarter 5 area steer price of $121, which also aligns with the USDA’s own average 3rd quarter price forecast. The CME today is pricing in a 3rd quarter average price near $114. The downside in cattle now appears to be limited to just a couple dollars of technical risk. Last week’s low in August cattle has so far held this week, and key support in August cattle rests around $112, at tiny chart gap left back in April and the 100 day moving average.
