Cancel the bullish whiplash effect

Pasture conditions were in excellent shape early in the growing season, but that’s all changed. September has been one of the driest months on record for many areas in the Midwest and Great Plains. Current pasture conditions are rated only 25% good to excellent with 45% poor to very poor. Earlier in the summer I thought we’d end the summer with excellent pasture conditions. Plenty of grass for grazing and large supplies of hay were expected to trigger a sharp drop in the fall cow kill and perhaps even stimulate aggressive heifer retention. In other words, the start of another cattle cycle. It appears that any ideas toward herd expansion are on hold.

Current cattle-on-feed inventory stands at 11.1 million, up 1% from this time last year. Placements have been larger than expected this year given the fact that the 2023 calf crop was record small. One factor at play is a large influx of imported live cattle. Cattle have poured into the U.S. from Canada and Mexico. Through July, live cattle imports are up 19% at 1.3 million. This is the highest live cattle import pace going back to 2012.

Another major factor is the fact that cattle weights remain record heavy. For months packers have been controlling the slaughter place to keep beef propped up in an effort to restore lost processing margins. The result is slaughter being down 4% year to date, but production is only down 1%. The other result is on-feed inventory is above year-ago levels despite historically tight cattle numbers.

Finally, there is ample evidence that consumers, wary of inflation, are actively trading down at the retail meat counter. All consumers have been hit hard by food price inflation, but the biggest impact is being felt by middle income and lower income families. The initial reaction was a scramble for ground beef. Now, it appears that even ground beef has become too expensive. 81% ground beef is down 18% from its high of a few weeks ago. The 50% beef trimmings are down 7%. Fresh 90’s has topped, as well.

During September, December live cattle futures have rallied $11.00 off the contract lows. The basis has narrowed dramatically with December futures currently trading par with cash. I consider this an excellent hedging opportunity, and I’m looking for a re-test of the lows into the next major seasonal low timing due in December.

Dennis publishes his widely followed evening livestock wire daily. For a free 30-day look at this information low, feel free to send an e-mail to dennis.smith@archerfinancials.com.