By Cassie Fish, http://cassandrafish.com
The deluge of selling which took 21,501 contracts out of CME live cattle futures open interest this week appears to be over. The charts have been damaged and fear factor has increased. Today’s quietly higher trade has done little to calm fears. Traders are wondering, with the market now oversold, if a recovery is on deck or whether next week will bring another collapse.
There is no argument that immediate fed cattle supplies are the largest of this year and for several Augusts. And with big supply comes price pressure. Though this does not explain the waves of selling that swamped the futures market this week, that came on the heels of last week’s very stable cash market action.
In this day and age of computerized trading, the who and the why remain a mystery to all but those clicking the mouse. There have been rumors and speculation of course, but the damage is done. With fundamental bearish analysis itself in large supply, the action can be explained to some traders’ satisfaction. Still, it is odd that the flood gates opened on Monday and the spigot ran wide open until yesterday.
It appears there was a large transfer of ownership from cattle feeder to packer this week at prices that significantly enhanced packer margins. This ought to support big kills as some plants are now buying for late August and early September. So maybe the break in futures, that inspired cattle feeders to sell aggressively, will have an indirect positive impact by ensuring kills big enough to maintain currentness. Shoving this much beef through the pipeline will keep a lid on boxed beef prices but that is really of little consequence to the packer who is focused on volume and sales realizations.
One of the chief lessons from Q4 2016 was when the pipeline expands to move more beef, any supply constriction that follows (remember the big production drop from Q4 to Q1 2017), a price increase is logical.
The key for the remaining 2017 cattle market is for the cattle feeding industry to maintain currentness through the peak supply of the next 4-6 weeks. That sets up the potential for a modest Q4 price recovery, assuming the excellent domestic and global protein demand continues.