Tumbling Down Again

Posted On: 06/13/2016

By Cassie Fish, http://cassandrafish.com

It is the second Monday in a row that CME cattle futures have collapsed and no one seems to understand why. Obviously, FC futures are responding to 8-10 cent rally in corn this morning but LC futures? Last week’s cash cattle trade was a bit of a disappointment though it was only steady to weak despite some packers needing cattle.

Boxes can’t be blamed either as they have outperformed upside expectations for weeks. Even though wholesale beef prices have likely topped, inventories are in good shape and weakness is expected to be limited this week.

Last week’s kill also exceeded expectations coming in at 591k and this week is estimated at 590k. Last week’s kill exceeded the same period a year ago by 51,000 head while this week is expected to top a year ago by 42,000 head as the lead over year ago slaughter rate widens and currentness improves. Weights dropped again and more cattle are anecdotally reported to be green.

None of this matters to futures. The futures price relationships many traders cut their teeth on have become irrelevant too. The front month’s relationship to cash, the good old basis, is comfortable in the $8-10 range with visits to $12 under not uncommon. Dec and Feb LC continue to generally trade par to Aug and Oct despite history, the seasonal and placement patters.

PrintThen there are feeder cattle. Despite both an enormous equity drain in the feeding industry and the seemingly impossible task of clawing margin back from the packer, continued insistence of some to “pay up” for placement inventory have kept feeders well premium of fed cattle. Now in the throes of a much-unexpected corn rally on the heels of a monster crop, feeders are finally giving some ground to fats. Though why fats aren’t steady to feeder cattle futures limit down is yet another example of live cattle futures defying rationale and fundamentals. Given LC futures’ sharp discount to cash fats, which is already factoring in a seasonal decline in cash fed cattle and boxed beef as well as an increase in fed cattle supplies, it would not be a stretch to see feeders lose $3.00 to fats today rather than a mere $1.50.

Cash fed cattle this week will likely trade be lower as cattle feeders succumb to the pressure of futures and the seasonal. Packer margins will widen. Thanks to the horrible futures market action, despair over what lays in store for this market in July and August is growing.

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