Posted on: 5/10/2017
By Cassie Fish, http://cassandrafish.com
CME cattle futures continued locked in their downtrend this morning, now making new lows for the month. The market manages to stage a few intra-day rallies but stays negative all the same. Last week’s skyrocket rally has been replaced by growing acceptance the Q2 high, which exceeded 2016 highs with ease, has been established.
With widespread expectations that a top in the boxed beef cutout is imminent as well as lower cash prices this week being a given, futures, despite the discount, are taking the path of least resistance. Bear spreads are working on the break.
Today’s mid-week on-line fed cattle auction trade was $138-140 compared to last week’s 5-area average of $144. Volume was small and some cattle did not sell.
The focus has turned to when and where the summer low will be made. Since the rally in wholesale beef prices have reduced the motivation to feature beef, and summer fed cattle supplies will seasonally increase, logic points to lower. Unfortunately, it’s difficult to predict how low the market will go and most fall back on using historical averages of an 18% decline or so from the high. At this point, most traders and analyst look for a late summer low this year, expecting August/September to see the largest supply.
However, the still-extremely-wide-basis will keep the incentive to sell cattle ahead of schedule very much alive and in play. Many June cattle have already been sold and as long as the basis provides the carrot to sell cattle early, expect cattle feeders to continue to do so.
Normally packer margins expand going forward, with the drop in cash cattle prices outrunning any weakness in beef prices- and that should be on tap. Right now, many throughout the supply chain are simply trying to manage the big changes in p&l. Some items are in short supply and garnering nosebleed prices such as beef 50s. Other items are backing up at the packer level.
Carcass weights won’t begin to seasonally increase until June and this year may see a very slow rise in weights due the high number of cattle that have been slaughter 100 to 200 pounds below their projected out-weight. This fact will provide some underlying support at some point for this market. But for right now, the packer has regained the upper hand and cash will quickly retreat in the next few weeks, likely back to where the explosive up-move began, in the low $130s.