A Case for Sideways

By Cassie Fish, http://cassandrafish.com

CME cattle futures continue to trade both sides, early action taking out Tuesday’s low only to find the market clawing back to green. Taking out $107.95 and making a new high for the week would be a good start in confirming the market has a solid underpinning, while taking out last week’s high of $108.55 would cinch it. Bears are focused on the vulnerability of $104.30 (only 100 points below today’s low) amidst fear that if futures were to return to sub-$105, the market would fail to the $101 area taking cash with it.

So, the lines are clearly drawn and the sideways action continues as the hours tick by.

Today’s FCE on-line auction had one pen trade at steady with last week. For all the nervousness- and cattle feeder worry has again grown each day this week- steady cash is likely the worst of it, which would make 3 weeks in a row of a $104-105 range. The packers’ chore of buying more volume this week may end up being relatively easy. Though an additional futures rally, particularly in Oct LC, could make it more difficult.

Overall though packer confidence remains high that ample fed cattle supplies, extremely profitable margins and producer psychology will allow them to maintain the significant leverage they have over the cattle feeder. Bids of $165 and $105 have been noted in spots, though lower bids are being floated as well. Well off the radar screen, an eastern Iowa fed cattle auction topped at $110.35 today to a major to fill an eastern Corn Belt plant.

Boxed beef values are stagnant and the choice/select spread has narrowed to even. The last time the choice/select spread was this narrow was mid-February when it, and the cutout as whole, bottomed. The relatively high price of beef 90CL trim has lent support to some select cuts as has generally solid ground beef features and demand. And it’s just a touch early for the seasonal strength in choice middles.

The wrecks of the last two falls will haunt cattle sellers and traders for at least a few weeks longer. Just the simple knowledge that carcass weights seasonally increase until November 1, coupled with the futures premium to cash, is enough to keep folks cautious to mega bearish.

Perhaps it’s worth remembering that 2017 has differed distinctly from the prior two years in the most important way. The fed kill. Since the last week of April, the non-holiday fed kill has averaged 508k. A kill of +500k may persist through much of October. The entire supply chain has domestically and internationally absorbed the largest and most consistent fed beef slaughter in a 5 months period since 2012. And it’s accomplished that at prices higher than the major cutout low posted in November 2016.

It’s true that some labor constraints have at times, limited production this year, but the reality is that packing industry has increased slaughter 5.8% over 2016 YTD, posting the highest per head federally inspected slaughter since 2013. Last fall some plants did raise wages, add staff and increase line speeds to accommodate the growing supply. Next, retailers heavily featured beef and consumers snapped up the savings. The industry is coming into the fall of 2017 having already demonstrated its ability to deal effectively with large beef and competing meat supplies. For the remainder of 2017 and into early 2018, the upside may likely be limited- but perhaps the downside is as well.
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