Just How Long?

By Cassie Fish, http://cassandrafish.com

It’s been seven years since cash cattle prices have been this cheap in August, occurring last in 2010, the beginning stages of the bull market. In comparison, the beef cutout value has dropped back only to 2012 levels for the same time frame, illustrating clearly the new normal of revenue distribution in the supply chain.

Fed cattle prices, already trading this week in the $105-106 area, are $15 below the 5-year average, $8 below the 10-year average and even with the 20-year average. The last time cattle traded at $105 or less was last November, as the market was coming up off its major low of $98 made in October 2016.

The problem is obviously not beef demand. Or unprofitable packers or retailers. The problem is muted demand for the current large supply of market-ready fed cattle. On a per head basis, current supplies are the largest they’ve since 2013 and for August, possibly 2011.

Many point to labor-related packing plant capacity limitations as the governing factor, but the industry killed more fed cattle in June than in August it appears. June is a great beef demand month and August is not and it will be mid to late September, before it improves, particularly on the choice rib which is the favored item in every Q4. Regardless, packers it appears, are in no hurry despite monster margins.

As August closes out and September begins this week, there doesn’t appear much if anything can alter the choke hold the packer has on the cattle feeder. Fewer formula cattle this fall will at some point, inspire more competition for negotiated cattle.

Technically, CME cattle futures failed miserably yesterday and have followed through on the downside today. Last week’s lows, the lows for the move as well, are in jeopardy and the chart suggests the market is vulnerable for another $3-5 slide. The $100 area in most active Oct LC, a not-out-of-the-question downside objective, hasn’t been visited since February and not since November on a spot basis, which Oct will become on Friday. Positives such as lighter carcass weights YOY and fewer cattle with 120 or even 90 days on feed mean next to nothing to this market under siege. Everyone knows cattle put on fat going into fall and weights and the number of yield grade 4s and 5s will seasonally increase.

At some point, all experienced traders know that packers will find themselves needing to load up again on negotiated fed cattle buys that don’t come as easily and competition will kick in. It’s just not yet.

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