A Breather After New Contract Lows

Posted On:  7/22/2016

By Cassie Fish, http://cassandrafish.com

It’s been a long week distinguished by lows. CME cattle futures made another round of contract lows. Fed cattle cash prices made a new low for the move, taking out the December 2015 low while boxes hit a new low for 2016.

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Once again, CME cattle futures are shaking off the bad news and posting a modest rally. In actuality, Aug LC aren’t really down all that much, down slightly more than 200 points from last Friday’s close. And from Friday’s high to yesterday’s low, the sell-off was only 600 points. With all that said, it would take a substantial rally to reverse the trend technically- even as the market sinks to modestly oversold levels. We end the week with the basis narrowed to almost $6 with 5 ½ weeks left of Aug LC.

Since the shorts have all the money made, it’s logical to think they’re banking some ahead of the weekend and today’s USDA Cattle-on-Feed report. Also, bottom pickers, heartened by today’s action, could be taking another stab at owning the market.

Interestingly, the industry has traded fed cattle every day this week and packers are still willing to take on more inventory today for $180 to $182 dressed, down a chunk from Monday’s $187 trade. This week’s kill of close to 600k requires packers replenish inventory regularly and it only makes sense to cheapen cattle costs if possible.

Choice boxes have lost $4.30 this week so far, $1 more than its select counterpart. The rib and loin are the seasonal weak links. Only the chuck appears to have finally found support at this point. Cheaper wholesale beef prices ought to be keep the end user engaged as they too, take advantage of another round of bargains and good margins.

There is already anticipation that boxes will bottom in the next couple of weeks and hold the December 2015 lows. Whether or not that proves to be the case will be paramount. This year has been unusual at times for boxed beef prices, for example, making a rare low in early May. Also fresh 90s are under some unexpected pressure currently, which isn’t helping rounds. While beef 50s seem to be immune to any downside, despite rumors a flush there is imminent.

Today’s COF report isn’t expected to tell the market anything it doesn’t already know, confirming we placed and marketed more than last June’s small effort on both. There’s no reason, other than the calendar, to believe that today’s futures rally is anything other than another rally in a bear market. Most folks are ready to put this week to bed and take another look with fresh eyes next week.

The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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Pundits Call a Bottom; Market Not Convinced

Posted On:  7/21/2016

By Cassie Fish, http://cassandrafish.com

It’s July, a bearish seasonal for cattle and a month known as a home for bear market bottoms. The cattle market has been going down for 20 months, with only a few intermittent, feeble rallies during that time. Fundamentals have improved dramatically from a year ago- from currentness to carcass weights to consumer beef demand.

PrintBottom pickers lie in the weeds while cattle market analysts offer that a low is imminent based on history and logic- certainly by August 1. Hedgers worriedly eye the market, loathe to get caught in a basis change but terrified to be unprotected. If not already hedged, it feels ‘too late’ to get on board now.

The fulfillment of new lows for the year in boxes and new lows for the move in fed cattle cash prices has occurred. The dominant question is, with so much bad news priced, what’s left to sink the market now?

         One of These Things is Not Like the Other

Live cattle futures are just that, cattle futures. Beef cuts can be hedged in live cattle futures effectively but live cattle futures themselves are not a reflection of beef demand. Live cattle futures are a reflection of fed cattle demand, especially in this day of what seems to be, permanently black packer margins.

Consumer beef demand has improved because retail prices have dropped dramatically from record levels. Retail margins are excellent and aggressive beef featuring will continue and eventually beef will become more competitive with pork and poultry as time goes on. Uninitiated market reports state live cattle futures are going down to poor beef demand. This is untrue. Live cattle futures are going down, in part, because it is not difficult for beef packers to cover a 600,000 head kill out of current supplies.

The packing industry has been methodically slaughtering an average of 595k cattle per week since the week ended April 23, taking out the two holiday kill weeks. For the same time frame in 2015, the market averaged 555k. Since April cash cattle prices have dropped $17/cwt. This is not to say that a break in fed cattle prices from a second quarter high to a third quarter low isn’t’ normal, it is. The point here is that it is relatively easy for the packer to put together a 595k kill. Perhaps it’s partly because placement weights have been higher and the window for marketing these cattle is smaller. Maybe it’s because of captive supplies. Or it’s because the hedger is an easier seller due to the fat basis. It’s arguably some of all above. Whatever the reason, it is a fact. There are simply enough cattle to go around.

As the fall uptick in beef demand arrives, maybe there will be a need to up the kill more than anticipated, resulting in more competition for fed cattle supplies, thus increasing fed cattle prices and finally giving the cattle feeder some leverage. Or maybe we’ll become so current on the front-end, even a 585k kill will be tough to cover. Or both. For now, however, there is zero urgency on the part of packers, retailers or end users when buying cattle or beef.

The well-advertised cattle herd expansion has become the fed cattle market’s Achilles heel and has proved almost impossible to get in front of as evidence by the steep discounts and the continuation of this methodical down. No longer is this bear market lurching limit-down. Instead it simply erodes more days than not. Establishing life-of-contract lows (which we did today by the way in most contract months) is no longer noteworthy. Today for many, the fear of getting caught short in the hole is greater than a further market collapse.

If this bear market is still in play a month from today, beyond the window of its much-predicted bottom, the opposite will likely be true.

The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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Basis Narrows

Posted On:  7/20/2016

By Cassie Fish, http://cassandrafish.com

A few fed cattle have traded at $115 in the south in the last 24 hours while Aug LC has decided to stage a rally, narrowing the basis to $3.50 to $4 the tightest since Aug became the lead option. The $115 cash trade takes out the triple bottom in the $116-$117 area that had developed from October and December 2015 to June of 2016. It’s only Wednesday, so it is possible that cash could strengthen as manage to hang on to support.

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Boxed beef values also dropped to a new low of the year and expectations are for prices to continue to weaken, possibly testing the December 2015 low.

Each and every time CME cattle futures ignore bad news and rally, the collective question is has the basis change begun or is this another false signal. Back in the day, Aug LC typically bottomed in the second half of July, rallying to par then premium of futures, as all cattle traders are aware.Print

Looking at history, if that is truly useful, third quarter cattle lows are made in July more than any other month. With the aggressive kill schedule making feedyards more current and lower retail beef prices spurring better demand, a July low doesn’t seem unreasonable fundamentally or logically.

At the same time, the packer, enjoying positive margins, is the one really setting the pace. Able to get enough inventory each week to cover the majority of his needs, paying up hasn’t been necessary most of the time. The reason July kills have exceeded expectations is simply because it has been profitable for the packer to do so. If the cutout slide deepens, a few hours could be pulled and kills eased- not what those hoping for a bottom want to see.

         Where Will Cash Hold Now?

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The above chart does not include this week’s $115 cash trade but is updated through last week. Next level of support is the 2012 low near $113.

2016-07-20_Chart1

It’s remarkable to note how different the various related markets look relative to history and each other. Cash cattle prices had already reached the lowest level since 2012. Live cattle futures reached their lowest level since June 2011 last week. At the same time, feeder cattle futures merely traded down to May 2013 levels. Corn prices traded down to their lowest levels since October 2014 this month. Boxed beef prices are trading at their lowest price since December 2015 but well above 2013 levels, as seen above.

This is a clear illustration of how significantly relationships have shifted, especially in the past year, mostly to the disadvantage of the cattle feeding industry. The CME feeder index has traded in a range of $140 to $150 since April, while the packer clearly has held tremendous leverage when purchasing inventory. Placement breakevens have cheapened but not dramatically enough for much profit on top of yardage. Will the industry attempt to claw back profit somewhere, somehow or accept these economics as a new normal?  Or is it waiting for the fourth quarter seasonal rally to provide relief?
Copyright © 2016 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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Inside Week

Posted On: 7/19/2016

By Cassie Fish, http://cassandrafish.com

Thus far, CME cattle futures are trading inside last week’s range. This is keeping bottom pickers hopeful and bears (if you can find any) on edge. The cash news has worsened this week- boxed beef prices have made new lows for 2016- while futures are still higher than last Friday’s close and 100 to 300 points above last week’s low. Obviously a basis correction of sorts has occurred.

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Boxes are under significant pressure; the ground beef complex a drag along with seasonally weak middles. Last week’s big production (the kill was revised up to 598k) on top of a 595k to 600k slaughter this week is keeping plenty of beef in the pipeline. Since packers have a head start on a black margin, lower boxes aren’t a problem, as long as they keep replacing cattle inventory cheaper. Of course if the boxed beef decline steepens, that could change.

Support on the choice cutout is $194-196 and on the select, $186, both the lows reached in December 2016 and far below the $202.81 and $192.45 established this morning.

Last week, even though it didn’t feel like it, saw 92,584 of negotiated cattle trade after all and plenty of formula and contracted cattle werePrint turned in to- all resulting in adequate inventory for packers. There have been some bids surface today at “will call” at $187 dressed north, steady with last week, which some would insist is bullish. Instead it could be the best the market will offer this week.

A shot down in the corn and beans today is providing support for feeder cattle futures, despite the fact that Dec, Feb and Jun LC are less than 150 points from their life-of-contract lows. Feeders are once again gaining on fats on the down, another sign that hope a low is near remains alive.

Copyright © 2016 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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Hopeful Rallies in a Downtrend

Posted On:  7/18/2016

By Cassie Fish, http://cassandrafish.com

CME cattle futures are staging yet another rally while the long-term downtrend remains intact. The futures market has recovered from another ugly, gap-lower opening. Aug LC is back above its 10-day moving average for the third day running. But the market needs to handily take out last week’s high of $113.55 before the real work of overcoming the key $114.40 to $115.35 can get underway. Unless a rally of that significance can occur and hold, the futures market remains locked in a downtrend. One could argue Aug LC, leading today’s up, is simply gradually narrowing the basis, now into a mere $5.

Fear of being caught short in the hole seems as good a reason as any for explaining today’s rally. Cash prices last week ended up $3 lower and clean up was just so-so. Boxes lurched lower Friday, with the chuck making a new low for the year as did the select cutout and 73% coarse grinds. The choice cutout is expected to lose $3-4 this week and sink to new lows for 2016.

Expectations for the cash trade this week are steady at best or another $1-2 lower, possibly threatening the cash low established in December 2015.

         Good News, Big Kill!

One important piece of good news is last week’s slaughter, coming in at 594k was 15k-19k larger than expected. Positive packer margins incentivized the bigger kill and even better, 595k is on tap for this week- a whopping 53k larger than a yearPrint ago for the same week. This larger beef production will likely weigh on the cutout, but the good news is the industry continues to move through market-ready fed cattle supplies at an excellent clip that- at some point- will translate to a better market.

The negative July seasonal is exerting pressure on this market and it is difficult to sustain an up in mid-July. Cattle trading veterans wonder often just what it will take to get a final flush to cement a low in this bear market, the ‘when’ and the ‘where to’ being almost secondary at this point. Many traders will watch for a significant change in tempo from this methodical down as a signal. For many, today is just another rally in a bear market.

Copyright © 2016 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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Momentum Slows; Tension Builds

Posted On: 7/15/2016

By Cassie Fish, http://cassandrafish.com

This week, CME cattle futures produced an impressive rally off of the contract lows made Tuesday and hope is high for many that this market has finally gotten cheap enough. Unfortunately for the bulls and bottom pickers, today’s action thus far is at the very least, non-committal and could be interpreted as running out of gas. Of course the day is far from over. Substantial overhead resistance in Aug LC from $113.77 all the way up to the key area of $115.35 must be overcome in order to cement a low has been established.

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Last Friday’s close in Aug LC was $112.22 and the market tried to hold on to that level today. But a slip to new lows for the day and has deflated optimism.

In the country, negotiated fed cattle trade is quiet. Bids in the north of $187 are noted by 2 packers while another sits at $186. There has been decent volume trade in the north already this week, close to 20k head, which has eased urgency for northern plants. In the south, packers are sitting on $117 bids with producers still passing. The fact that the negotiated cash market is once again within spitting distance of their 5-area average triple bottom is not lost on any one- $117.71 September 2015, $116.64 December 2015 and $116.74 June 2016.

This week’s slaughter is expected to come in at 575k, down substantially from the 602k average for June, making it a little easier for packers to round up inventory. Expectations for the rest of July are for 580k weekly kills. Despite the smaller kill thus far in July, the USDA select cutout made a new low for 2016 yesterday afternoon and the choice chuck primal, the largest of the carcass, dropped to a new daily low for the year, near the December 2015 low. The choice cutout is down $5.05 from a week ago and less than $2 from the 2016 low uncharacteristically made back in May.

July weakness in the beef complex is seasonally normal. Still this decline continues to demonstrate that when the middle meats are not experiencing a rally, the chuck and the round present a bearish undertow. On the trimmings side, 90s have been rock steady (which is providing some support for the round) while beef 50s have outperformed upside expectations for weeks and could be on the cusp of a downward correction.

The remainder of July stretches before this market and the as tempting as it is to assume the downside is limited, having confidence in that same assumption is proving challenging. Lighter carcass weights, better beef exports, lower beef imports, a terrific June marketing number, cheaper retail prices- all these positive fundamentals are well-known and much discussed, yet the cattle market still seems possessed by bearishness. The source of this bearishness has become more difficult to identify, let alone quantify, in light of these many positive accomplishments.

Though not necessarily provable at this point, I submit a theory that a macro cattle and beef industry shift is underway, the result of multiple packing plant closings and a migration to and increase in formula-based and forward contract based selling arrangements that has occurred over the past 10 years. Now that the cattle industry is expanding supply and the packing industry has withstood the worst of tight supplies, leverage for the packer has increased along with packing plant margins while competition to secure inventories has declined. Even when supplies were the tightest in modern history, competition in 2014 for fed cattle did not rival the competition to procure inventory seen on the 2003 rally. It simply has become more difficult to force the packers hand as frequently as in days gone by. Perhaps that is what the market is reading as bearish.

Copyright © 2016 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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New Highs for the Week Renew Optimism

Posted On:  07/14/2016

By Cassie Fish, http://cassandrafish.com

Led by lead month Aug LC, CME live cattle futures are making news highs for the week in most contracts with Aug up over 500 points since Tuesday’s new life-of-contract low was made. At the same time, cash bids in the south have improved from $116 to $117 and are still being passed. The battle here will likely be between $118 and $120. Last week’s 5-area average price was $120.02. In the north, bids are still $186 to leaning toward $187, which most producers are passing in light of the futures rally.

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         More Up or Not?

Technically, Aug LC rallied back to $1 shy of the 40-day moving average and last week’s high today. If the market could close above $114.40, that would be considered technically bullish. As it stands right now looking at the bullish checklist, Aug is higher on the week. Short-term technical indicators are becoming overbought. All this leaves traders asking is this another rally to sell or the beginning of a major bottom. Futures big discount to cash has, in of itself, kept folks from becoming overly bearish simply because the price itself looks to cheap.

         Cutout Sliding

Boxed beef cutout values are finally sagging after holding up better than expected and are now just a couple of bucks above the 2016 lows and poised to make a new low for the year next week. Still packer margins are black and replenishing cattle inventories at cheaper money is wise, especially on the heels of last week’s smaller trade.

         Cheaper Retail Prices!

Good news was found in this week’s Wall Street Journal U.S. Retail Meat survey, with beef down for the third week in a row, dropping below $5 per pound to $4.73- a full dollar below year ago levels. This is proof that cheaper beef prices are finally becoming commonplace after a very long absence. As good as clearance has been, prices this cheap would seem to insure consumers will continue to respond by buying more beef.

         Heat on the Way

A “heat dome” is being widely discussed and could impact the Corn belt cattle feeding area from central Nebraska east into Iowa and north into eastern South Dakota beginning next Wednesday, possibly lasting for 10 days. The potential for this developing into a major event will be closely monitored both for its impact on corn pollination and corn prices as well as the possible effect on market-ready fed cattle and gains in general. Getting cattle sold and shipped before a heat event will be on the minds of many.
Copyright © 2016 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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