Posted On: 05/16/2016
By Cassie Fish, http://cassandrafish.com
Last week saw the biggest transfer of ownership of fed cattle from the cattle feeder to the packer in the negotiated market since October 2013. Nationally over 160,000 head changed hands as short bought packers with the biggest production schedules since June 2014, win-rowed inventory. Indeed, last week’s surprising 601,000 head kill was the biggest since June 2014, 33k more than a year ago and 24k more than last week.
Just as importantly, several consecutive weeks of big kills have resulted in more current fed cattle supplies than since before the industry started “making cattle big” the summer of 2014.
Boxes also had a very big up last week and packer margins managed to stay black even after paying up for cattle. This week boxes will increase in value again, how much is being debated.
Cattle Futures Holding On
CME cattle futures, except Jun LC, are holding their gains today, supported by last week’s great fundamental news combined with their large discount in price. Hovering near the 100-day moving average and generally above last Friday’s high, last Friday’s ugly low in hindsight, and might have been a buying opportunity. If futures trade and close above last week’s highs in any of the contract months, the charts could take on a decidedly positive look. Similarly, a close below Friday’s low will look dire.
Bears point to the likelihood of a cutout top this week and the strong seasonal for fed cattle prices to decline the rest of the life of the Jun LC contract as reason enough to be short- regardless of the $10 discount to cash Jun LC seem to like to carry. Bulls readily say this year is an exception and fed cattle supplies will be too short to pressure the cash market back to the low $120s.
Therefore, it will be a week-by-week evaluation as this market heads into summer. The continuation of the decline in weights, highly anticipated but yet to be confirmed is key. Robust slaughter levels through June are also paramount. The dance between cattle feeders and packers will continue as usual, with cattle feeders willing to pull cattle forward and packers willing to kill them as long as margins continue black- while consumers enjoy the cheapest retail prices in over two years.
Going back to the beginning of 2012, cash fed cattle prices have spent only 13 weeks, or 7.8% of the time, under $120, yet the cattle futures market is convinced that by July, cash prices will drop below that level never to see +$120 again. Really?
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