Gap and Go

Posted on:  02/21/2017

By Cassie Fish, http://cassandrafish.com

CME cattle futures didn’t wait around this morning to reflect the optimism for cash cattle and boxed beef prices this week, but gapped higher immediately. Spot Feb LC is leading the charge, taking out its last swing high, it made a new high for the month, reaching the highest level since January 26. It appears that Feb LC may follow in Dec LC’s footsteps and expire strong. Resistance for Feb looms from $120-123.70.

Technically, the market is in a strong position, with plenty of room to extend this rally to the upside. Friday’s rally was accompanied by an increase in open interest, another plus. The CFTC’s Commitment of Trader’s report was also positive, showing a healthy decline in managed fund longs and commercial short-covering. Perhaps the market has regrouped and is ready for another sustainable up.

Expectations for the increase in fed cattle supplies this summer and fall have kept futures’ discounts to cash at record or near record levels and caution in the air. But the aggressive fed cattle slaughter rate and improved beef demand occurring for weeks, is supporting fed cattle prices for now and likely will for another 4-6 weeks. There is more and more talk that cattle are being pulled forward as motivated cattle feeders eagerly trade cattle each week.

Last week’s negotiated trade was large, at 125k, the largest in 2017 and in over 3 months. Packers continue to pick up better-than-average +22 day sales which incentivizes keeping production levels up and inputs secured. One could argue that packers won’t need to buy as many this week on the heels of last week’s big trade, but forward contract numbers for March are down 80k head from a year ago, so packers will need to rely more heavily on negotiated trade for supplies.

Going home Friday, expectations for steady to firm cash were common. Today, there is speculation cash will be $1-2 higher this week. There is growing confidence cash cattle prices will retest the highs made in January in March. Boxes were higher yesterday, cementing the February seasonal low. Packer margins are still not great in the spot window, but other forces are at work, such as a continuing effort to more fully leverage plant resources and competition on the sales side.

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