Cattle futures markets were down significantly last week including a 4.5-cent limit decrease last Wednesday for the August feeder cattle contract. Live cattle trading at the time of this writing has the nearby contract at just under $109 and the October contract at around $107 per cwt. These prices are undervalued when compared to the cash market prices which are around $115. There are many potential reasons for this decline with the increased supply of cattle to hit the market this fall a primary culprit.
Beef demand is relatively lower after the sharp increases in May and June. The choice boxed beef value is $205, down nearly $45 from just two months ago. Much of this decline is seasonal variation. Beef demand is usually higher around the start of summer grilling season as Memorial Day and Independence Day help to boost sales. However, the recent lower prices have left boxed beef just above August 2016 prices. This can be viewed as slightly positive since prices are higher even though beef production is 3 – 4% higher. However, the futures market signals worry over prices as we approach the Fall.
While the supply concern will remain throughout 2017, relatively cooler weather in cattle feeding areas also probably had a short-run impact on the decline in futures markets last week. Cattle generally gain weight faster during lower temperatures which could result in heavier beef production sooner than expected. Carcass weights are also seasonal and have begun to increase. Usually, weights will increase throughout the Fall and into the Winter months.
In summary, the movement of the cattle futures markets last week is a signal of the challenges that will continue throughout 2017. Most traders, including those of large funds, are currently bearish on prices as they consider the impact of more cattle flowing through the system.
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