Posted On: 05/24/2016
By Cassie Fish, http://cassandrafish.com
CME cattle futures made new lows for the move today, though there have been a few intra-day rallies to sell- or raise a bull’s hopes- depending on one’s bias.
Though it is not showing on Mandatory Price Reporting, a rumored traded yesterday afternoon in Nebraska for $198 dressed to a major packer for delivery this and next week, sent the jitters through many cattle feeders as the news spread. Whether true or not, it was a graphic reminder that the path of least resistance continues to be lower, given the calendar. It’s the “how much lower how fast” that is in question.
With the big discounts, futures have a head start on seeking lower prices but with the seasonal screaming lower, no one can argue against it, at least not successfully so far. Aug and Oct LC are taking the brunt of the selling now as the focus on just how low cash can go during July/August/September. Even optimists generally anticipate a trip back to the December cash low of $116-117 sometime this summer.
What is different about this break compared to the Q4 2015 break is that there was a problem then that needed to be fixed. Lowering out-weights, becoming more current was believed to be the ticket to a better market. So that is what the industry focused on and as of last week, weights dropped below year ago levels for the first time in a couple of years. Cash also had a $22 spring rally from the December low.
Now the industry faces what is expected to be a normal summer seasonal in a more current marketing position, thanks to bigger kills and better retail interest than a year ago. The big kick off to summer grilling season is this coming weekend. But improved currentness is expected to only soften the break, not prevent it, which is translating to fear because the available actions for cattle feeders has the appearance of being even more limited. Pulling cattle ahead, staying hedged the discounted board- are two of the short list of options.
A major third option is rethinking feeder cattle values and lowering bids on feeders for placements. As the last couple months have acutely shown, it has become quite difficult to take any margin back from the packer- even when the news is good. The cattle feeder has no choice but to buy feeders cheaper and push the loss further down the supply chain. The pressures on equity in the cattle-feeding segment are just too great.