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US cattle squeeze drives futures to record high

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Cattle futures set fresh record highs as Tyson Foods, following up data showing the smallest US herd on record, underlined the US supply squeeze, which it forecast would worsen in its next financial year.

The US meat giant, unveiling a 4.4% rise to $260m in earnings for the April-to-June quarter, forecast a drop of 4-5% in supplies of fed cattle in the US in its next financial year, which starts in October.

The figure compares with a forecast of 3-4% decline during its current financial year, and implies that beef prices, which have hit a succession of record highs thanks to tight cattle supplies and resilient demand, will remain elevated.

"If you look at the environment, you got to believe the beef prices… you're going to have a similar environment next year as this year," Donnie Smith, the Tyson Foods chief executive, told investors.

Herd shrinks

The comments follow official data late on Friday highlighting the extent of decline in the US cattle herd, and its impact on supplies of fattened animals.

The US Department of Agriculture pegged the US herd of cattle and calves at 95.0m head as of July 1, the lowest since it in 1973 began recording data at this time of year.

The figure was down 2.9% on the figure for July 1 2012, the latest comparable figure, and included a 2.5% drop in inventory of beef cows and a 2.1% drop in heifers, future breeding stock.

"This number implies that the herd rebuilding process will take significantly longer than many expect and the beef industry will have to contend with tight feeder cattle supplies through 2016," a report from Paragon Economics and Steiner Consulting said.

Commerzbank said: "The problem was caused years ago by drought in key cattle-rearing areas, with high feed costs reducing the profitability of cattle breeding.

"Once stocks have been reduced, it takes a very long time to build them back up again."

Feedlot dynamics

A separate USDA briefing, on US cattle in feedlots, also highlighted the beef squeeze, with the number of animals on feed down 2.4% year on year at 10.1m, head as of the start of the month.

Cattle placements on feedlots tumbled 6.2% to 1.46m head last month, despite the boost to margins from lower grain prices and record beef prices – if not the elevated price of feeder cattle, that is, animals ready for fattening.

The decline in placements of larger cattle, of more than 700 pounds, was particularly steep, tumbling 14%, contrasting with a 13% rise in take-ins of animals below 600 pounds, which will need more fattening before sale.

The high number of lighter animals thus implies a particular squeeze in shorter-term supplies of live cattle, that is, animals ready for slaughter.

"In addition to placing fewer cattle on feed, feedlots also have been placing increasingly lighter cattle," Paragon Economics and Steiner Consulting said.

"[That] effectively stretches the marketing window and further limits the number of cattle that we should expect to come to market in the October-to-December quarter."

Record highs

Live cattle futures for August touched a record high for a spot contract of 160.25 cents a pound in early deals in Chicago, before easing to stand at 158.925 cents a pound in late deals, down 0.1%.

"Front month live cattle futures are showing signs that market is a little tired up here," said Jerry Stowell at Country Futures.

Feeder cattle futures for August hit a record for a spot lot of 220.975 cents a pound before easing back to 219.90 cents a pound, up 0.8% on the day.

On beef prices, the wholesale value, the so-called cut-out, of choice beef rose $1.39 per hundredweight from Friday to a record $258.77 per hundredweight.

Lower grade select beef was $1.71 higher at $256.04 per hundredweight.

Hog outlook

Tyson Foods added that hog supplies would recover in its 2015 fiscal year, by 2%, after the drop of some 5% in the current year, a reflection of the outbreak of porcine epidemic diahorrea virus (PEDv).

"It looks like to us that more hogs are going to be coming to the market in the fall," Mr Smith said.

"With grain prices coming down you're likely to see a little bit of finished hog expansion, perhaps in the latter part of our 2015 year."

While Tyson Foods' earnings in its latest quarter equated to $0.75 per share, some 3 cents below market expectations, the group raised its estimate for sales in the year to the end of September by $1bn to $38bn, ahead of Wall Street expectations of a $36.9bn result.

For the 2015 financial year, the group forecast sales of $42bn, including the integration of Hillshire Brands.


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