Live cattle futures are testing the highs posted last July. Cash steer prices have been higher for seven consecutive weeks, peaking last week at $192.00/cwt. The low in December live cattle futures in September was $173.50/cwt. with the recent high at $189.50/cwt., for a $16.00 rally.

The cash steer market has moved from $178.00-$180.00 to $190.00-$192.00/cwt. for a $10 to $11 move. During this same timeframe, the Choice beef cutout has moved from $305.00/cwt. to $322.00/cwt. for a $17.00 move. Because beef has outperformed cash, beef packer processing margins have moved from unprofitable levels to profitable margins. The question that looms large: will futures break out to the upside this winter, or are we looking at a top?

The perception and expectation has been that there would be a severe shortage of fed cattle develop this year. It’s never happened. What has happened is the beef cow slaughter has been down sharply this year, creating a severe shortage in trimmings used to make ground beef. This has forced users to grind the round and chuck primal cuts to fill the hole in trimmings production. During this period the packers have controlled the slaughter pace, keeping kills down, supporting wholesale beef and forcing cattle weights to record highs. Experience has taught me that heavy cattle weights is never a long-term bullish fundamental development for cattle prices.

On Friday, October 25, the USDA released a monthly “Cattle on Feed” report. The report showed the inventory of feedlot cattle as of October 1 at 11.6 million, unchanged from last year. Cattle placed into feedyards during September were pegged at 2.156 million, down 2% from September of last year. Cattle marketed for slaughter during September was measured at 1.698 million, up 2% from last year. As noted, the placements were larger than marketings, lifting on-feed numbers from September 1 to October 1 by 400,000. If the market is expecting a tight supply of fed cattle to develop, the math is going the wrong way.

As drought conditions developed in late summer, the report showed placements of calves weighing 800 to 900 pounds up 1.5% and placements of calves weighing 900 to 1,000 pounds up 5.1%. The report confirmed that fed numbers are tightest in Kansas, residing at 95% of last year. Finally, and perhaps most compelling, this report indicated that heifer on feed inventory is at the second highest in over 24 years. This data clearly indicates there is no heifer retention occurring in the industry as of October 1. The theory or expectation for tight fed cattle supplies was predicated by the outlook for aggressive heifer retention this year. It’s not happening.

The other side of the coin, demand, presents a wide variety of opinions and expectations. No one can argue the fact that inflation, and specifically, food price inflation over the last four years has battered the U.S. consumer. Inflation is regressive in nature meaning it impacts middle class to lower class much more than upper class. Inflation at the gas pump has similar regressive effects. Current retail beef prices are record high and they were record high most of last year as well. I believe that U.S. consumers are “fed up” with food price inflation and many are choosing to do what is called “trading down” at the retail meat counter. This involves first moving away from steaks and other high priced beef cuts and instead moving toward more ground beef. Second, as high prices persist, even for ground beef, trading down involves moving away from beef and toward cheaper protein sources such as pork and poultry.

Measuring demand and more specifically measuring and quantifying changes in demand is most difficult. As analysts and traders, we don’t get monthly demand reports from the USDA as we do monthly supply reports. I believe that no one analyzing and trading live cattle futures today (including myself) was active in the market the last time consumers experienced the type of inflation of the last four years. You must go back more than 40 years, to the late 1970’s and early 1980’s. So, when it comes to beef demand and what’s going to happen with beef demand, we’re all guessing. However, my guess is as good as anyone's. My guess is that consumers are beat up, ripe with debt and looking for a way to cut expenses. Many consumers simply don’t have any money left at the end of the month.

It’s my unpopular opinion that consumers are moving away from beef and beef is in the process of losing market share of the consumer food dollar to pork and chicken. Because of the clear supply side evidence that there is no shortage of fed cattle and because of my opinion regarding the U.S. consumer actively trading down, I’m not looking for an upside breakout in live cattle futures and instead, I’m looking for top. I have advised partial hedges. I suspect that in thirty to forty days, what will be clear is whether I’m right or wrong.

Dennis Smith publishes his widely followed evening livestock wire daily. For a free 30-day trial to this information flow that also includes a morning livestock report and a midday pork and beef update, please send a request to [email protected].