Posted On: 05/18/2016
By Cassie Fish, http://cassandrafish.com
CME cattle futures behave as if they are marking time until the current good news cycle ends and summer seasonal softness replaces it. The only thing is the â€œgood newsâ€ is compiled of major underlying fundamental changes from the status quo of the last couple of years.
Plummeting carcass weights (soon to drop below year ago levels) the lowest carcass yields in a long while, yet another 600k kill this week, a wide choice/select spreadâ€”all mean fewer, leaner market-ready fed cattle. Currentness is returning after a 2-year absence. With it, improved bargaining position heading into seasonally weaker timeframe.
That futures donâ€™t believe any of this is stating the obvious. Yet for the third day in a row, breaks have failed to gain momentum.
Packer bids have surfaced today, a Wednesday. In eastern Nebraska, $205-206 has been floated, well below last weekâ€™s $210 dressed. While in Kansas, a $132 trade â€œwith timeâ€ has been rumored, below last weekâ€™s top of $135 but just below the 5-area average price. Packers are attempting to do their best and imply lower cash this week is a fete accompli, following the seasonal tendency. Packers do own a lot of inventory.
One more good news wild card is Fridayâ€™s USDA Cattle-on-Feed report, which will possibly show less cattle on feed May 1 than a year ago- a result of excellent marketings and light placements. Thoughts are May placements have picked up a very modest pace.
The blistering boxed beef rally experienced the last couple of weeks have pushed packer profit margins well north of $50 per head, even when considering the lagging comprehensive cutout. A sunny and warmer weekend coming up may spur some retail beef sales. Still, there is widespread anticipation boxes are topping after retracing the April rally- not making it to the lofty March high when beef 50s were had a dramatic surge.
If the news this week or next is once again â€œgoodâ€ futures may be forced to push above key technical resistance just overhead. Jun LC has held the gap left a week ago Monday but has refused to do much since other than consolidate. A glance at a weekly chart reminds traders to consider that perhaps the April low, new contract lows all the way around, possibly priced the summer low. Even when summer seasonal weakness is finally in full swing, how cheap can the market trade, especially with the improved underlying fundamentals?
This setup makes for a treacherous trade, and the where and when of a summer basis change is potentially more important, from a trading perspective, than much else.