Small Basis Correction in an Ugly Down Week

Posted On:  06/17/2016

By Cassie Fish, http://cassandrafish.com

It is the final day of what has been a week marked by surprising weakness. Monday’s unexpected limit-down move was followed by a fed cash cattle market that weakened what seemed like hourly.

As cash declined, live cattle futures managed to find support near the May lows and scrambled 270 points from yesterday’s low to today’s high before backing off once more. With cash prices $6-8 lower than a week ago compared to Aug LC currently $4 below last Friday’s close, basis has finally made a move to narrow.

The most disheartening aspect of this week for the cattle feeder is the inability to trade volume at any given price. Packers have bought a few hundred then backed up repeatedly. Understandably, it has been difficult for cattle feeders to assimilate how fast prices have melted down, which has stymied decision-making. There will be some cattle carried over into next week, when the prospects don’t necessarily look much better.

The USDA weight data released yesterday showed a small gain, right on time seasonally, though steer weights are still 2 pounds below last year’s record.

PrintSome good news, this week’s kill is expected to clock in at 596k, the second largest of 2016, spurred by good beef demand and excellent packer margins. Boxed beef prices have begun their seasonal correction this week and the historically wide choice/select spread has begun to narrow. But the drop in cattle costs for packers this week have given the packer a head-start in holding margins together, even as many are braced for a $10 drop in the cutout next week. Kill will stay well above year ago levels this summer.

Many are ready to turn the page on this week. Futures are oversold, but not grossly so. Perhaps yesterday’s lows in futures meant something and a triangle is forming. The basis change associated with summer cattle markets could have begun and continue next week or this week could have been a false start. As wild and unpredictable as this market has been, it is tough to have much confidence. Nevertheless, it remains important to acknowledge the improvement in critical fundamentals such as beef demand and feedyard currentness and just as important to fight to hold onto these improvements the rest of 2016.

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