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Cattle Feeders Create Some Gap, But Don't Get Caught Looking Back

Finally some reprieve. October proved friendly to the fed market which showed signs of life during the month.

Finally some reprieve. October proved friendly to the fed market which showed signs of life during the month. Halloween finished the month out on an especially positive note. Cattle buyers bid generously; fed trade was solidly $2-2.50 higher than the previous week. The market finished the month at $87-8 - a far cry from just 30 days ago when cattle feeders saw trade encroaching $80. October's finish and November's open places the market back at levels not seen since April. Moreover, weekly beef tonnage has exceeded last year's mark five times in the past six weeks.

Cattle feeders have done an excellent job of negotiating and marketing cattle for the past several weeks. Unfortunately, commodity businesses never allow time to celebrate. I noted last month, "Just about the time it appears there might be some promise of better prices, or at least the establishment of firmer footing, the market gets trampled back to lower levels." Therefore, the real test for the market is ahead of us. Can the market solidify last month's achievement and tag on some additional upward momentum? Unfortunately, while spot prices have improved in recent weeks the longer-term prospects have diminished: December live cattle peaked near-term at $88 on Oct. 23 and have since reversed direction back to $85. The 4-week moving average provides some additional perspective where we currently stand. Despite recent gains, the fed steer 4-week moving average was $84 at the end of October - smack in the middle of the 2009's high ($87) and low ($81), respectively.

There are several critical hurdles to overcome before declaring any type of major victory as we transition into the holiday season. First, live prices moved higher separate from any major upside for the wholesale market. As has been the case all year, Choice boxed beef prices continue to trade in a relatively narrow range. The market has established fairly firm support at $135. However, cutout values persistently seem to hit resistance around $140 (with $145 being the upward boundary in 2009). That reality was readily exhibited in recent weeks and will pressure further upside potential for the fed market. Second, the wholesale market's virtual ceiling coupled with higher live prices of late has been at the packer's expense. Processing margins have declined sharply during the past month (see second graph below). While that's expected seasonally, it establishes a tougher overtone for weekly negotiations - especially in a year like this (more on that later).

Switching gears to the production side, October's cattle-on-feed report provided some valuable insight relative to decision making in the cow/calf sector. The report included the quarterly "number on feed by class" estimates. October's numbers came in about as expected. Heifers were pegged at 38.3% of the total feedyard inventory - up only slightly from July's figure (see graph below). But that's key; it suggests no major reversal of the overall trend in recent years. The data reveals that cow/calf operators remain cautious about expansion. If August and September serve as indicators (and there's no reason to believe they won't be), there likely won't be an unusually large number of heifer calves staying at home this fall to be developed as replacements. (January will be our next snapshot of the heifer population in feedyards coupled with the annual total cattle inventory which includes heifers retained for replacement purposes.)

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