The slump in cattle prices - which hit a five-week low in Chicago amid ideas that "fund liquidation has officially begun" – should be curtailed by demand for packers for animals, supported by lower slaughter weights.
Live cattle futures in the last session hit their weakest close in more than a month on a spot contract basis, at 121.90 cents a pound for the June lot.
The lot is now down 9.4% from a contract high set two weeks ago, weakness attributed by many observers to seasonal factors, with the passing of peak retailer stocking ahead of the US Memorial Day holiday.
This holiday, on May 29, typically sees a rash of barbecues, and is seen as ushering in the US grilling season.
'Rallies will most likely fail'
In the cash market, cattle fell to some $137-138 per hundredweight on Tuesday, from levels as high as $147 per hundredweight a week before – a trend some commentators saw continuing.
Jerry Stowell at Kansas-based broker Country Futures forecast "$130-133 cash fed trade in the south this week," saying that "we remain bearish cattle into late spring and summer".
He added that "the fund long liquidation has officially begun," and reversal of the buying which drove the managed money net long in Chicago live cattle futures and options last month to a three-year high of 138,355 lots.
"All rallies will most likely now fail. Sell them," Mr Stowell advised.
However, USDA officials cautioned against overpessimism, saying that "expectations are that prices will remain relatively strong, despite declining from recent peaks".
They flagged a drop in average cattle slaughter weights – estimated at 1,325 pounds, down 11 pounds year on year – as the higher cattle prices have encouraged feedlots to make timely sales of animals, rather than fattening them on.
"Packers maintain relatively high rates of cattle slaughter to mitigate the effects of lower carcass weights," the USDA said.
Indeed, the dent to cattle prices has revived packers' margins, which stood at $109.45 per head of cattle on Tuesday, up $24 from Monday, and compared with negative margins of $6.25 per head a week before.
Feedlot margins to fall?
The USDA highlighted the potential for some support for cattle prices from a slowdown in marketing by feedlots, after a period when their margins have been boosted by the high animal values and "relatively cheap feeders purchased two quarters earlier".
"Feedlot operators could face declining returns if fed cattle prices decline with increased supplies of cattle in the second half of the year.
"To the extent that declining fed cattle prices squeeze feeders' margins, feedlot operators may opt to keep cattle on feed longer in an attempt to push bids higher."
The comments come amid ideas of a crossover in feedlot dynamics from a period of squeezed supplies of fattened cattles – their inventories of cattle fed for more than 120 days hit a 10-year low last month, according to Steiner Consulting Group – to a richer pipeline ahead.
Placements of feeder cattle for fattening on feedlots in March rose 11.0% to a record high. Fattening typically takes roughly six months.