Basis, Basis, Basis

By Cassie Fish, http://cassandrafish.com

The big story in cattle trading has been the big narrowing of the basis last week that has continue this week. At one point, Jun LC was $12 under cash and now it is $5.22 under last week’s cash trade using today’s high and 0.50 over to $2 under this week’s scarce bids. Packers so far have not been rattled by the futures rally, now a couple of days old. Concern that cash might trade lower this week has shifted to the possibility that steady is now possible, especially with rumblings that boxes are close to a bottom. Even if cash trades steady, how much upside exists for Jun LC?

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There is significant overhead technical resistance from $118.77 to $120.02, capturing a series of old lows followed by chart point failures. Above that key area are the 40-day and 100-day MVAs, $122.54 and 123.18 respectively. It would seem higher cash would be needed for those areas to be tested, unless Jun LC is willing to go premium to cash, something that hasn’t happened since 1998, with the exception of one week of May in crazy 2008.

So looking at history it is possible, though not probable Jun LC would make a power move and vault premium. The 10-year average for the basis the first week in May is $4.37, cash minus Jun LC, and the 5-year is $6.38.

So has this basis change signaled the downside for cattle futures is over, at least for 4-6 weeks? Jun LC has rallied 450 point off its double bottom low reached last Friday, though it feels like much more.

         Packer Margins Lose Some

This week’s drop in boxed beef values have reduced positive packer profit margins by at least one-third to one-half. The sense that feedlots are getting cleaned up and not many market-ready cattle exist behind what is shipping now continues to permeate conversations and thought processes. Still proof in the form of lighter carcass weights is needed and today’s weight data will be closely scrutinized.

Volume of boxes sold in spot picked up nicely this week at lower money and there are high hopes cheaper wholesale prices mean big beef features for Memorial Day weekend. According to the Wall Street Journal retail meat survey released today, the 15-cut average price for beef declined $0.22 to $4.99 per pound, while pork and chicken clocked in at $2.96 and $2.08 respectively. Ground beef prices for six major U.S. cities was reported at $3.67 per pound, down $0.20 from last week and down $0.89 from a year ago. Grilling features were noted.

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