Not So Fast

By Cassie Fish, http://cassandrafish.com

CME cattle futures poor action today has disappointed all those enthused by Friday’s close. But then it’s August, kills are big, plenty of protein is for sale and competing for consumer dollars split between back-to-school prep, vacations and simple, stripped-down, summertime eating. High-end steak restaurants typically see a slow-down in August too, which will reverse post-Labor Day.

In the meantime, the cattle and beef industry is pushing the largest beef production through the pipeline for August since 2013. The cutout has been very slow to carve out it’s late July/early August low this year though a seasonal modest, seasonal rally is still expected between now and the end of the month. But it’s been a slog and none of the primals are providing much leadership. The blistering cutout rally of May and early June may be a memory to many but end users haven’t forgotten and a certain amount of pay-back is still being played. Profitability throughout the supply chain and zero sense of urgency are a combination for a slow price recovery.

Last week’s 634k kill is expected to be followed by a 638k this week. As of last Saturday, the industry has slaughtered 1.037M more cattle than last year and the number will continue to widen this quarter. Packer margins are still solid, but since it’s more effort to move product, packers are still not enthusiastic.

Packers let their cattle inventory drop last week, buying only 76k head for immediate use and 15k for 15-30 days out. That lighter buy ought to be enough to push cash cattle prices a buck or two higher this week than last week’s $117.30 average. Though today’s disappointing futures action will begin to erode thoughts that last week’s $118 will now be exceeded.

Such is the way of things in this market. It’s possible the market is in a state of loose equilibrium and futures in a swingy sideways chop.

Most active Oct LC is unexpectedly back to the bottom of the trading range today and it was noted in the recent Commitment of Trader’s report that managed funds exited more longs and began adding shorts, though not to a significant degree. Open interest has liquidated dramatically in recent months and doesn’t appear to cast a major threat.

Is today’s action any more bearish than it was last Monday when the market was down here? The Aug/Oct spread is 150 points wider than a week ago. Does that fact that the market is methodically working through supply in a relatively efficient but entirely lackluster manner provide no incentive to be long, even after an outside week with a higher close on Friday? Perhaps not. Maybe the market is expressing disappointment today and nothing more.

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