June Live Cattle Finally Lead; Packers Chase Big Strings

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Big rally day in live cattle futures yesterday, with June posting its highest close ever at $139.50. Contract highs were made in all other contract months. Although June didn’t make a contract high, it gained on August steadily throughout yesterday’s session and continues to do so today, picking up 87 points on the spread since Wednesday, the low in the spread.

Thus far this morning, June has posted a triple top in the $140.07 area, keeping the traders short the 140 calls on the cusp of danger for now. The rest of the gang short calls are under water.

So what’s in store for June LC? In a perfect world, June takes out $140, and makes a run to $142.32, filling the gap on the spot chart left by the April. It’s worth pointing out June’s recent break to $135.40, was just very slightly more than a 50% retracement of the last major leg up on the spot chart which began with a low of $118.15, made the last week of June 2013, last year’s summer low and the high made the last week of February 2014 of $153. Perhaps the summer low is in? Maybe. With August 1.50 over the June, a retracement in August back into the upper $130s seems likely at some point this summer.

         Packers Mobilize on Thursday

Packers pursued some “big strings” of cattle yesterday. A large number in Kansas traded $6 over June LC; another sold out front for last week of June delivery in the mid-$140s. Both trades making it clear, numbers continue to be unexpectedly and exceedingly tight as we look ahead to July 1. There was some regional packer activity in the $146-149 level in Iowa.

         Boxes Slip; Kill Sub-605; Margins Still Black

Yesterday’s USDA Boxed Beef Cutout value dropped $1.12 on choice and $1.97 on select, which is down $2.66 and $1.88 from a week ago, respectively. Week-to-date kill is 464,000 head and is setting up to come in today under 605,000-something expected by no one, not even a week ago. Packer margins are still black and that is the single most important factor contributing to the cash market’s ability to maintain mid-$140 prices, besides the industry’s currentness.

The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef/CBP shall not be liable for decisions or actions taken based on the data/information/opinions.

Live Cattle Futures Grind Higher; New Highs Deferreds

The widespread anticipation for larger numbers of market ready fed cattle by May 1, then June 1 and now July 1, have kept a lid on the front month of live cattle futures this spring. Basis has been historically wide, as the industry, convinced the cattle will “be here soon” has kept a confidently bearish outlook.

       June LC Still Too Cheap?

But as we approach first notice day for June live cattle on Monday, the $138.57 price tag is starting to look a little too cheap. When we started “The Beef” on May 1, the first column was specifically on “Are June LC Too Cheap”? Here we are a little more than one month later, asking the exact question.

Eyebrows were raised and questions abounded last week after a major beef packer bought three weeks of showlists at mid-$140s prices.  Why would a packer make that trade if more market-ready cattle are near? Apparently the hunt for market ready cattle to fill June slaughter slots is the driver and a difficult task that seems to extend throughout cattle feeding country and to all beef packers.

With slaughter levels historically small in 2014, and nothing but placement data to use to project slaughter, the fact that killable numbers  for June appear to still be tight is a potentially explosive powder keg.

      June Option Expiration Tomorrow and Big OI in Calls Looms

Options expire tomorrow for June LC, and open interest in the 138 calls is 6,495 contracts, 139 calls 2,237 contracts and 140 calls 3,960 contracts.

The $140 level in June live cattle have stopped the market dead in its tracks twice and it’s seemed a safe bet that level is impenetrable. Tomorrows close in June LC could be its most critical.

Perhaps the Junes will wait until the last 3-5 days of trading to make their move. At the very least, the June/August spread, which pushed to a new low yesterday of 217 points, June under August. This bear spread action seems to be a function of moving open interest around as much as anything, but it would seem reasonable to expect the June/August to at least trade back to even money before expiration.

The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef/CBP shall not be liable for decisions or actions taken based on the data/information/opinions.

Slaughter off to Slow Start Raising Perplexing Questions

Fed cattle slaughter refuses to rise to meet most analysts’ expectations despite positive packer margins. Monday’s kill was revised down to 113,000 head, yesterday came in at 118,000 and now predictions for this week’s slaughter have dropped from 610,000 or higher to 600,000-605,000.  But why?

Theories include that there simply aren’t enough market ready cattle to easily kill more now, and last week’s plummeting yield data seems to support that assertion. Another is that packers, after closing quite a few plants, have smartened up in recent years and unless aggressive consumer demand warrants it, would rather “balance” input and output at an acceptable plus margin than reach for more.

Thus, the fact that the kill has yet to ramp up to expected summer levels of 620,000 plus does not seem to be backing up cattle. The question of great interest is when do these smaller kills become problematic? Or do they ramp up in the nick of time? At this point, it appears rather indisputable that the increase in fed cattle supplies for 2014 are loaded in the third quarter. Anecdotes and math seem to support that fact.  How the market handles this increase is the key to success the next 3 to 4 months.

            Big YTD Beef Imports Continue; Australia the Leader

In the meantime, imported beef from Australia continued to pour into the US, and supplant domestic fed end cuts for the ground beef grind. Year to date, AUS imports are up 26.86% and total beef imports YTD up 6.34%.

            Futures Trading at Top of Recent Trading Range; OI Builds

Someone has made some big bets this week in live cattle futures. Open interest has increased in LC futures over 10,000 contracts since Monday as futures have pushed to the top of the trading range established in the last 2-3 weeks. Maybe Friday’s commitment of traders report can shed some light to see if money managers are getting long or commercials.

The wide basis continues to be a supportive factor as well as new all-time highs in feeder cattle futures once again. On the other hand, a long summer stretches ahead and domestic beef demand appears to be adequate, but nothing more, in spite of historically small production. Maybe a big swingy chop, sucking traders into buying rallies and selling breaks is our most likely scenario for the time being.

The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef/CBP shall not be liable for decisions or actions taken based on the data/information/opinions.

Have Live Cattle Futures Bottomed Already for the Summer

Last week’s eagerness by packers to own cattle in the mid $140s for as many as three weeks out have given the market a bullish shot in the arm. As a matter of record, last week saw the largest reported volume of negotiated cattle sold in 2014 at 117,157 head in USDA’s 5 Area Report, with the average price at $144.86. This compares to June Live Cattle still trading under $139, even with today’s rally.

The currentness of fed cattle marketings seems to be the current dominating market fundamental, combined with black packer margins. There is even debate that the awaited increase in fed cattle supplies this summer is overstated and that perhaps, the market will sail through the summer, with August futures actually bottoming in May at $136.60 and the cash market holding $140 for a summer low. Could the summer basis change be close at hand?

         Futures Impressively Strong

Futures are higher this morning, with most active August coming within 35 points of its contract high, made 2 weeks ago when futures posted a weekly reversal, failing at $140.90. A close above that level would be considered technically bullish. Another failure here indicating the market has likely established the top of a trading range. Spot June LC certainly carved out a trading range for itself, in February and March, managing to expand the top of the range by $1 in April and May, but unable to establish a true uptrend.

         How’s the Beef

Let’s take a moment to examine how beef seems to be moving in the heart of prime beef seasonal demand.

2014-06-03_Chart1

Let’s examine the most recent price data. The first chart shows prices during the last week in May retesting last month’s high. Seasonal timing shows that as slaughter increases into the summer, prices decline, typically testing the low made earlier in the year and sometimes making a new low. Projections for a summer low on the comprehensive cutout are $205 to $210 by most analysts, $15 to $20 above last year. Is it possible or even likely that last week was the last hurrah for the boxed beef rally for now?

Weekly boxed beef sales volume last week was the fourth smallest of 2014 with an uncharacteristic drop in formula sales combined with a sluggish spot trade. Of course production was small last week as well.

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         Time Will Tell

Debates will continue about how the cattle feeding and meat packing industries will fare during the summer of 2014. Given the number of cattle on feed and the historically small slaughter levels since mid-December 2013, it’s tough to mathematically arrive at anything but kills running 620,000 head or higher through the summer, including killing 20,000 fewer cows than a year ago. That will require packers to run more than 40 hours per week at some plants to accommodate that size slaughter. If all remaining plants run 48 hours per week, killing 6 days, and we slaughter 100,000 cows- that projects a weekly cattle kill of 668,000 head—plenty of room.  But positive packer margins will be required to incentivize adding hours.

The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef/CBP shall not be liable for decisions or actions taken based on the data/information/opinions.

June Begins with Mixed Signals

Last week’s much smaller than expected federally inspected cattle slaughter of 537,000 head was a shocker to industry observers, as most expected 550,000-560,000 range. It was rumored one of the three major beef packers had chosen to opt out of the Saturday kill. The result is one of the smallest, if not the smallest, Memorial Day kill in memory. Specifically, slaughter was down a whopping 10 percent from the same holiday kill a year ago. What’s harder to fathom is why such a small kill with packer margins in the black.

Still even with the smaller slaughter, boxed beef cutout prices appear to have topped last week, although the 537,000 kill coupled with a stunning summer weekend may cushion the seasonal descent. Expectations for this week kill are in the 615,000 to 620,000 range.

         Fed Cattle Outlook This Week

Cash cattle this week are generally expected to trade with a steady to lower undertone; though last week’s brisk trade left cattle feeders in good shape. Currentness is excellent. Live cattle futures are likely to trade in a choppy fashion, supported by their discount but limited on rallies by the seasonal. Last week’ low in most active August LC of $136.60 is critical support along with the 40 day moving average of $136.30.

         Cheaper Corn; Stronger Feeder Cattle

Excellent weekend rains in much of the western to central Corn Belt and the growing realization that the summer of 2014 may produce an enormous crop, (not to mention great grazing conditions) are providing support for already bullish feeder cattle. Feeder cattle futures checked last week’s life-of-contract highs already this morning. This market may be overbought and subject to technical corrections at any time, but the long term bull trend is intact and cheaper corn will only add fuel to the fire.

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The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef/CBP shall not be liable for decisions or actions taken based on the data/information/opinions.

Is June Live Cattle Futures Too Cheap?

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Here we are, May 1. We said goodbye yesterday to April Live Cattle which expired at 145.82, only one tic below where the April contract was on March 31. June moves into the lead $8.62 behind April and $8.96 discount to last week’s 5-Area Weighted Average cash cattle price of $146.16. And since it is spring, we’ll turn to baseball for some guidance and tune in to the game…what’s the count on June Live Cattle?

Strike One

The seasonal answers our question by saying the cash fed cattle market is going lower while boxed beef cutout values rally over the course of the next 6 weeks or so. It’s the packers turn (although he has had more weeks YTD of profit thus far than a typical year in spite of short fed supply-even while running less than 40 hour weeks). Packer margins turned black this week and are expected to stay that way for several weeks. Most market participants, based on placement data believe fed cattle supplies will begin increasing in mid-May and continue to do so through the summer and that singular supply increase means lower cash cattle prices.

Ball One

The worry over the “sustainability” of these new price levels of cattle, wholesale and retail beef (and the lack of fund interest) has kept the futures market structure discount, not only to cash prices but the successive months are cheaper than the front month, (with a normal premium in the fourth quarter to summer months). This structure is a classic, old fashioned, climb-the-wall-of-worry bull market. This type of market structure encourages cattle feeders to sell cattle- which keeps marketings current. And despite the migration to formula and contract selling which gives the packers a known inventory for weeks to come and the advantage that comes with that- currentness remains something cattle feeders still control. And when the cattle feeding industry is current, it is still bullish.

Strike Two

Live cattle futures made their spring high Feb 28. Cash topped four weeks later. We’re 9 weeks out of the high in futures and yesterday, June futures were $15.75 cheaper than the top. There
are rules of thumb around calculating spring high to summer low breaks in fed cattle and many, applying those rules, predict the summer low will be in the $128 to $132 range. Again, pointing to the logic that June Live Cattle futures are not too cheap, but instead, are too high.

Ball Two

Attitudes remain bearish. The cattle feeding industry has been and is heavily hedged despite the futures discount to cash. The extremely substantial capital requirements to feed cattle now and challenging debt ratios have resulted in much greater pressure from the banking community for cattle feeders to “protect” themselves. In doing so, the cattle feeder isn’t able to
fully restore his equity position as his risk management strategy eats a chunk of his profit. June futures have become the current whipping boy, with lots of short “legs” as well as hedges focused there.

Ball Three

It’s May after one of the worst winters in decades in many major population centers. Demand will increase-for hamburgers, hot dogs, steaks. Packers will add hours, increase kills. Grass will green up. Cow runs will decline. The industry will continue to grind a higher percentage of cuts of the round and chuck primals. The cutout will likely return to its high reached in mid-March (choice $244) and might even surpass it. Because of the currentness of the industry as we approach our increase in fed supplies coupled with the pent up appetite, numbers may be absorbed with only minor price pressure. June Live Cattle could then be, too cheap.

Ball Four

PEDv. Yes, we’ve all heard about it and it’s a little like the boy who cried wolf currently. But, given the credibility of the reports, it remains quite likely it will be a major factor impacting the protein sector this summer. A decline in pork production of even 5% would be meaningful and most predictions are closer to 10-12% shortfall for summer.

On Base

From where we are sitting, June Live Cattle has the possibility of surprising, not with weakness, but with strength. Last week’s technical action was positive- an outside week with a higher close, after testing and holding the low it made in March. We’ve had upside follow through this week. $138-139 should offer some resistance. And any commodity trader will tell you the June will be under pressure by the roll the first two weeks of May.

Still, watch closely as packers attempt to ramp up kills (this week 595,000 to 600,000 head) with the calves coming late and green. A close over $139, the contract high, will be June Live Cattle crossing home plate.

 

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Our intention is that “The Beef” be a place for frank talk about extreme market conditions and changing times in our industry, the reasons for them, and the possible strategies to adapt to survive. We intend to ask questions, and delve into market topics that might be considered controversial or even uncomfortable to discuss. If you’re not getting a fresh point of view on the market here, we’re not doing our job.

We are in the midst of enormous changes: the ways cattle feeders and beef packers conduct business; questions about the current state of price discovery; escalating capital requirements to name a few. So we decided it was time to talk about them- often. Our goal in doing so is to gain some understanding which hopefully broadens thought processes and enhances decision-making.

The U.S. beef business epitomizes what’s best about self motivated, independent, resilient American businesses and goes to the very heart of capitalism. We may be in the midst of change, but that fact is one that does not need changing.

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The Beef is published by Consolidated Beef Producers…for more info click here.

Disclaimer:  The Beef/CBP shall not be liable for decisions or actions taken based on the data/information/opinions.

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