Investors should be wary of getting too bearish on feeder
cattle prices – thanks in part to a knock-on effect of weak wheat prices
earlier this year.
Futures in feeder cattle, animals ready to be fattened on feedlots,
have fallen sharply in the last 10 days, undermined by ideas of a seasonal easing
in beef demand ahead, following the father's day boost to demand.
Meanwhile, strong placements of feeder cattle on feedlots of
late have been taken by some investors as a sign of ample supply.
In the last session, some feeder cattle futures contracts tumbled
the 4.50-cents-a-pound limit in Chicago, down in the last session, with the
spot August lot ending down 2.6% at 146.125 cents a pound, down 9% over the
10-day slide, and reporting its weakest finish in nearly two months.
"Both live and feeder cattle markets are now looking
decidedly wobbly," said Tobin Gorey at Commonwealth Bank of Australia, flagging
that funds, "heavily long, have been selling but are likely to have still more
The managed money net long in Chicago feeder cattle futures
options, at 17,368 contracts last week, was among the highest of the last five
However, US Department of Agriculture officials cautioned
against getting too downbeat on feeder cattle prices, questioning whether the period
of strong placements, which were up 12% year on year in April, can last for
April's surge in placements on feedlots compared with only a
modest rise, of 0.4%, in the number of feeder cattle outside feedlots as of the
start of that month.
The extent of the jump in numbers of feeder cattle heading
to feedlots reflected in part the lure to producers of strong prices, but also
a temporary spike in availability as animals were removed from winter wheat
pasture, to free up the land for spring plantings.
"Higher-than-normal wheat graze-out likely occurred in the southern
Plains as a result of very low wheat prices," the USDA said.
"Then those calves on wheat pastures were likely marketed in
April, allowing for wheat producers to plant a summer crop."
In fact, the "large placements of calves during April would
likely have further tightened the number of feeder calves available outside the
"Although feeder calf prices are expected to decline from
their second-quarter peak, they will remain above year-earlier levels into early
The thinking on feeder cattle supplies was echoed too by
livestock analysts at Steiner Consulting, who said that so far this year,
feedlot placements have exceeded year-ago levels by 595,000 head, equivalent to
an 8% increase.
That is more than the 565,000-head increase in the total
2015 calf crop.
"Most of the increase in calf crops that has been registered
for 2016, or earlier, has already been moved into feedlots," Steiner Consulting
"From this point forward, it becomes difficult to see how
the supply of calves or yearling cattle will support any increase in feedlot
placements relative to a year earlier."