See Saw

Posted On: 06/09/2016

By Cassie Fish, http://cassandrafish.com

CME cattle futures have looked terrible, looked great, looked terrible and again great moment by moment, hour by hour and day by day this week. If you read market commentary, Monday was proclaimed a technical wreck and yesterday a technical victory. So far, neither is true. What is true is that intra-day volatility in cattle futures has become a permanent fixture.

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Traders and cattle feeders can’t help but wonder if “this rally will be different” and futures will finally and decisively take out overhead resistance and close the big gap between futures and cash. Beef demand is good, kills are big, packers are historically profitable, the cattle feeding industry is finally current- all these facts argue for an improving futures market. If it weren’t for the calendar (July typically sees cutout weakness) and the perceived impending supply increased placed against the third quarter, being long here could be a no-brainer.

The wide basis has kept many from selling this market on rallies for fear they’ll be caught when the basis narrows. One could argue the on-coming greater third quarter feed cattle supply will keep Aug and Oct LC discount well through the summer and the typical July/August basis change may not occur until post-Labor Day. That is just a theory.

         Back to Today

In the meantime, this week’s cash cattle and boxed beef market has performed well and at least one northern packing plant needs cattle yet for this week. Panic though, on the part of packers, has not been extensive or lasted long in the cattle market looking back over the last year or more. Last week’s negotiated cattle trade totaled 124,344 head, one of the biggest trade volumes of 2016, which would indicate not all packers are out of position across the board.

Beef clearance this weekend and next will be critical as to setting the tone for the cutout as we head into July 4th. Feature focus traditionally shifts from strips and ribeyes to burgers and hot dogs and dog days dominate until August. The rib and loin primals will correct seasonally after a stellar 2016 performance in June while the chuck and round, still near their respective lows for years, seasonally move higher. How this plays out will translate to cutout values in July, which seasonally weaken- about half the time making the low for the year. The shallowness or steepness of the summer cutout correction- that could very well begin next week- will perhaps carry more importance than in other years. The ease or difficulty in moving product in July and August will at least partly determine packer eagerness to continue to keep slaughter levels elevated 20k to 40k head above a year ago. Those big kills are the single most bullish fundamental of 2016.

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