Disconnect, Dismay and Disgust

By Cassie Fish, http://cassandrafish.com

Yesterday cash cattle prices were dollars higher as packers competed aggressively to buy inventory to supply big kills. CME cattle futures reluctantly rallied for a while then turned tail and collapsed. Old habits die hard and for most in the cattle and beef industry, watching the futures trade, formerly yielded some sense of market fundamentals. Not anymore.

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That was then. This is now. It really began in 2014. Futures never built in premium despite the lowest beef supply per capita in modern history on the immediate horizon. The shorts were never punished, despite the most bullish set of fundamentals since the 1970s. There was no blow off top. The end of the mighty bull of 2014 was a whimper not a bang.

Instead, the shorts were rewarded and the longs were punished. People forget there are short and long hedgers of cattle futures. Ridiculously wide basis, in favor of the short hedger is the new and seemingly permanent normal.

The ingrained bearish nature of cattle futures prevalent for a couple of years now may never change but the underlying fundamentals of the cattle market have changed significantly for the better in recent months. Many of the bearish fundamentals that dominated the market in 2015 have reversed, though you would never know it by the steeply discounted futures market. Acknowledging of course, the beef herd is expanding, but the discounts are excessive still looking at history.

Imports are down hard; the erosion of the export market has ceased and gained ground back. More importantly, cattle weights have dropped, now only 3 pounds above a year ago and choice grading is below a year ago- proof the industry has become more current in their marketings. Retail beef prices are down dramatically from year ago record high prices. Weekly kills have exceeded expectations for what is now the third consecutive month and cattle with June out-dates are being slaughtered. Just released this morning, consumer sentiment made a new high for the year. Perhaps a package of steaks will find its way into a few more grocery carts this month.

For some the improvements in the fundamentals are being brushed aside in favor of focusing solely on the “seasonal” of fed cattle prices, and the likelihood that the $133-135 live prices traded yesterday will succumb to prices back in the $120s or worse this summer. That’s the reason futures failed yesterday many are saying. Our memories are short. It was just two weeks ago, when Jun LC traded down to $114 and the fear that break fueled convinced some cattle feeders to sell cattle for $124 for delivery this and next week. As much as $11 below where prices were yesterday. Futures are relentless in their efforts to convince that each rally in the cash market might be the last.

Despite their volatility and lack of credibility, everyone continues to give cattle futures too much credit. Reading the futures market action is a habit for most of us. For some there is still hope that a more rational and logical market will return. Futures used to serve the hedger while risk takers made a market for the risk laid off. Now, trading is running the exchanges and perhaps the world.

This is the primary focus of the recently published book, “Other People’s Money” by John Kay. Kay says, “the finance sector needs to be reminded of its primary purpose: to manage other people’s money for the benefit of businesses and households. It is an aberration when some of the finest mathematical and scientific minds are tasked devising algorithms for the sole purpose of exploiting weakness of other algorithms for computerized trading.” Further, “a shift from agency to trading, from relationships to transactions is a central aspect of the financialisation of Western economies.”

Sound familiar?

So perhaps focusing on fundamentals first and futures trading second as a source of market direction is worth considering. After all, the fundamentals will ultimately drive this market to its destination, regardless of CME cattle futures gyrations.

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