Posted On: 06/14/2016
By Cassie Fish, http://cassandrafish.com
As CME cattle futures continue to decline today- led by expiring spot Jun LC trading over 200 lower after limit losses yesterday- serious concern regarding the vulnerability of cash fed cattle prices over the next 60-80 days is growing. Certainly, cash prices may give back $3-5 this week, but it is the uncertainty and fear over what’s to come when supplies increase and demand slows that is anchor pulling this discounted market lower. Will cash prices revisit the low made December 2015 of $116.64, the lowest level since the summer of 2012?
It is hard to believe that YTD, cash prices have averaged $132.24 using the 5-area average with the low cash price YTD made the week of April 25 of $123.79. Remarkably and perhaps even bizarrely, the entire strip of CME cattle futures is trading well below the last December’s low mark with the action seeming to insist that cash prices will indeed capitulate.
This market structure is even more frustrating because in the real world, all sectors of the supply chain have done their job in 2016 and more beef is moving the consumer at lower prices than in the last few years. Reigniting consumer beef demand was seen as crucial and excellent progress has been made this year in doing just that. Beef production YTD is up 3.2% and yet demand for choice middles has soared this spring. The loin primal just made all-time highs for June.
Because the fundamentals have improved, selling the futures discount itself creates anxiety. Even though the dog days of summer beef demand loom ahead just as fed cattle supplies are expected to edge up in second half July, August and September, it is tough both to sell the discounted futures market and tough to stay short.
Technical Picture Bearish
Yet open interest did increase on yesterday’s break as new shorts were initiated after futures technical failure, yet again, at the 100-day moving average. Technically cattle futures look bearish. Most active Aug LC is 190 points away from its life-of-contract low made in April of $110.92 and 137 points from the May low. Given the calendar the expectation is relatively high that futures will make another life-of-contract low this summer. There is also an expectation that boxed beef and fed cattle prices will be lower seasonally over the next 4-6 weeks.
The question looming continues to be whether the basis will stay as wide as it has and both whether and when a basis change will occur. Back in the day, futures tended to bottom in July go premium to cash, signaling the summer low was in. That possibility still exists but confidence as to when and how or if it will occur is as volatile as the market itself. This only adding to an already difficult trading environment, both in futures and cash.