Spreads Turn

By Cassie Fish, http://cassandrafish.com

CME cattle futures have traded both sides today but there are some subtle changes. With just a few days left to go on the Goldman roll, Oct LC has finally found its footing relative to the rest of the contracts. After weeks of a huge bear spread move, with the Feb LC reaching almost $10 premium and the Dec LC almost $6, Oct is hinting strongly today that was far enough.

How much Oct LC can rally here will depend on the negotiated cash cattle trade this week and next. Cash prices have been in a downtrend for weeks, averaging under $105 the most recent two weeks. This morning, a few bids of $102 and $103 have surfaced in the south and some fat cattle auctions are coming in higher than last week.

Given the shrinking inventory position of packers, it’s unlikely they can wait until Friday to buy this week. It’s been three weeks in a row of declining negotiated trade volume as packers relied on the many cattle bought with time, formulas and contracts. Expect more packer competition this week and cash prices fully steady to higher.

Last week’s boxed beef trade, as reported in the USDA Comprehensive Boxed Beef report showed a slow-down in business. Volume declined in all categories after two consecutive weeks of brisk business. No doubt the severe weather impacting major population areas impacted movement and active fill-in buying will surface over the coming weeks as conditions normalize.

It’s a couple of week out before seasonal demand for middle meats finally begins. At the point, the rib and loin continue to be a drag on the cutout value.

Slaughter schedules are set for the remainder of September, packer margins are $150-$200 per head black and the fed kill will run between 505k-512k, as the race to end the fiscal quarter culminates. A kill of that level ought to keep the cattle feeding industry from losing any additional currentness, despite the premiums being carried by futures.

These same premiums have motivated cattle feeders to pay up for replacements and feeder prices are pushing higher, aided by expectations of cost of gains as cheap or cheaper than last year. With slightly more than 3 months left in 2017, some have become convinced that 2018 will see a repeat of the strong prices experienced the first half of 2017. The hard reality of herd expansion pushed into the background for now.
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