Cattle Futures Tank, Traders Exit; Correction Underway

Cattle Futures are consistent in their behavior. This market hasn’t been able to put more than two big up weeks in a row back to back before reversing to catch its breath and shake out longs. This week proved no exception to this pattern as futures tumbled lower yesterday, making a new low for the week and again after the evening session reopened and is lower still this morning.

Spot August LC quickly erased 445 points off its newly scored contract high of $160.25 and retreated first back to the safety of an old contract high made July 7, one that held the market in check for a little more than a couple of weeks before being taken out July 23. When that didn’t hold, a full out rout began and limit down doesn’t seem out of the question.

         Bears in Command Today

Bulls are dismayed and frustrated. Bears are relieved and emboldened. One bear in particular is a large commercial, and credible talk points to them as leaning especially heavily on August LC in particular this week. With technical indicators overbought, this player’s timing was right on, and futures caved.

​The Bull of 2014 has managed without long leadership, while more than one large commercial has carried big short positions as the market has ascended. Could the excessively wide basis be credited to the lack of big cash-connected longs combined with the influence of a couple of large commercial shorts- an unanswerable yet interesting question.  Since the P&L’s of the big shorts this year have posted staggering losses, we guess the basis is their victory.

         Any Fundamental Reason for the Futures Break This Time?

As folks are want to do, we look for reasons for the ups and downs. We got a kick out of Larry Sommers quote in this morning’s New York Times, when asked why the stock market is lower when no one can find a stand out reason. He explained that the market had been “preternaturally” calm prior to the break. Guess that’s as good as any.

This Cattle Futures break, like the many others we’ve seen in 2014, seems predicated primarily on the widely held belief, in spite of evidence to the contrary, that our good news won’t last.

         Are There Any Signs? 

This week’s kill will clock in at another 570,000 head or so, even though 580,000 head was talked about earlier. Packers do have a larger Saturday scheduled as production is being pushed out to a later date to fit demand. Such a small output is supportive for the cutout, but are we backing up cattle?

Yesterday, the USDA released its weekly update of weight data and indeed, weights were up and stand at a record high of 869 pounds. Are weights excessive or burdensome, no. Are they understandable, certainly with the swap between COG and selling price. Does is mean we’ve lost currentness? Not yet.

         Back in Today’s World

Since they hold their biggest inventory is weeks, packers will probably wait until after futures close and likely buy cattle no worse than steady and possibly weaker. It’s what happens next week that will be the key to spot August LC. One major packer has been aggressive in buying inventory out front (and big-time correct), and has paid in the mid-$160s for delivery of cattle between now and Labor Day. Why? Apparently this swap is also a good one- about $65 per head good.

Have we topped? Follow the money.

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.

Narrow Range as Cattle Futures Mark Time

All the excitement this week in Live Cattle futures happened Monday and ever since then, we’ve traded within Monday’s 210 point range. Yawn. It would be boring except we are at all time highs and the technical indicators are clearly showing a market losing momentum. The obvious question is, are we topping or resting?  And it’s pretty disappointing, or even downright aggravating action to bulls considering the dynamic up in cash prices last week, which have been followed by impressive gains daily in the beef cutout value and expanded beef packer profit margins well over $50 per head.

         Futures Lower as More Look for Steady Trade

The bears are out this morning, with one major packer spreading the word that they’ll be able to buy cattle cheaper this week. Fact is packers do own more inventory than in quite a while, so it’s understandable they would try and leverage that position and regain some bargaining position. That is what packers do, thus the lack of bids/inquiry/interest this week.  And cattle feeders are making great money and have an incredible basis (if hedged) so why argue? $165 or $168, it’s all good right?

         Open Interest a Burden?

As we head into first notice day Monday, open interest in August LC stands at 49,423 contracts this morning. Now a chunk of that will go away with the options expiration Friday and we have 20 days until LCQ expires, so it doesn’t seem a problem. But traders like to look for explanations and this is one to explain the flat out refusal of August to narrow its gap to cash. Another is that by the end of August, cash will have topped and be headed back down under the lofty $160+ level.

         The Beauty and Frustration of a Patience-Testing Realizing Bull

Worry prevails, doubters are many and the pay off doesn’t come until the bitter end. One of the most famous and respected long term realizing bull market traders was the great J.R. Simplot.  He was known for buying a limit position soon after a cattle futures contract was listed and would quietly ride the rally until the very end. The Bull of 2014 would have been his kind of market.

Nothing’s really changed, but corrections do come- the old “pause for the cause”. Seems to us, when this market begins to act out of character, charging higher, gapping and gasping as shorts blow, then we might be getting close to a top. Until then.

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.

And the Bull Beat Goes On…

All systems are still go for the Bull of 2014. The cutout, despite the multiple warnings of disaster, continues to make new all-time highs, with choice printing yesterday afternoon at $261.34, up a couple of bucks. And there is even credible talk circulating that the battered middles have found their footing, indicating that we likely, ain’t seen nothing yet.

If carcass values are firing on all cylinders again and packers modestly increase production beginning this week, cash cattle prices above the rarefied air above $160 appear solid as a rock. The ends are golden as a lot of ground beef patties are in production now to meet the needs of schools, K-16, in preparation for the return of students in a few short weeks. And we all know the cows just aren’t there to kill and imports of grinding beef are already running 14% above a year ago YTD.

         WakeUp Cattle Futures Wake Up

Cattle futures are higher this morning, making a decent show of it, with plus +100 fats and feeders. But prices still lag miserably behind the real world, with lead August unable to crack $160 when most cattle traded last week $164-65. Despite futures lack of enthusiasm for the bullish fundamentals, technical measurements off of the long term spot chart portend a move to at least the mid-$160s before August LC expires 4 weeks from Friday.

The bull spreads are working again today, so Dec and Feb weren’t able to take the lead for long despite the lack of placements illustrated in the COF report. Though August still hasn’t been able to catapult over October and go premium, which seems, fundamentally at least, exactly what should happen.  And Feeders retook the leadership role yesterday and are maintaining their command today. Given the short supply of feeders, the huge return on fed cattle closeouts and the promise of dirt cheap cost of gains soon, there’s no telling how higher feeders will ultimately trade.

         Cash Fats Higher This Week?

The sensible, conservative call for cash this week is steady. After all, last week we were up big, shouldn’t we catch our breath? Packers do seem to be playing it cool thus far this week and they do seem to own more inventory than in a while. Only thing is, the available supply of market ready cattle is still relatively tight and in strong hands. And the packer seems to have learned the lesson that owning inventory is the only way to play the Bull of 2014, to avoid being left out in the cold.

Packers are black, this week’s kill is expected to be up by 10,000 head and the packer seems to like the market despite its price tag.  And really, what’s not to like? Nothing unless you’re a bear.

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.

Measuring Last Week’s Mega Move

Last week’s big up in cash fed cattle prices is being singled out as historically large. But going back to the 1970s to the present, using the old Texas/Oklahoma steer price data series and measuring by percentage not dollars, last week’s rally was 23rd in cash-cattle-one-week-rally history at 6.45%. Ten of the 22 bigger moves were posted in the 1970s with the biggest one week rally occurring in July 1974, up 13.37% in one week! One all of us remember is October 2003 coming in second with a 13.27% run in a week’s time. Perhaps using the argument that last week’s cash rally was “too much at once” or a “sign of a top” might not be quite as compelling as it seems.

         Negotiated Volume Surges as Packers Reach for Inventory

With that said, packers did buy a lot of cattle last week with last week’s negotiated trade one of the largest going back to 2012. According to the USDA’s National Direct Slaughter Negotiated purchases, 134,961 head traded, compared to 112,775 a week ago and 98,170 a year ago. And because there are fewer cattle on feed, a larger percentage of cattle are trading negotiated than a year ago as well. In fact, the industry has traded more negotiated cattle than a year ago for 10 weeks in a row straight, accompanied by active packer participation and competition and record high cash prices. Great proof that all of the above combine to create true robust price discovery.

         Bigger Kill this Week as Cutout nears $260, Another Record

Talk is that this week’s kill will be 10,000 head bigger than last week, now that packers have some inventory to work with and packer profit margins actually widened. Yesterday, the choice boxed beef cutout was up $8.78 and the select was up $12.09, still fueled by the grind.

         While Cattle Futures Disbelief Remains Consistent

After making contract highs yesterday morning from August out to April 2015, futures have retreated yet again, refusing to be drawn in by the bullish fundamentals. Futures themselves have become the most fade able aspect of the Bull of 2014, consistently proving that ignoring bullish news doesn’t make the bullish news any less bullish.

         First Notice Day Next Monday 

In the old days, the bears would be scared to get caught “short in the hole” with strong cash and futures carrying a $5-6 discount. But with no one left to say “bring ‘em boys” and stand for delivery, like in the old days, futures stay meekly behind and short hedgers enjoy an abnormally large basis, so the basis traders are rewarded, rather than punished for staying short. And the opportunity lost is ignored.

So August will be another spot to go down to the end, with traders having one eye on the cash for signs of weakness and another on the still too cheap futures, to see who will ultimately win this particular round.

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.

COF Report Reinforces Long Term Bullish Fundamentals

Cattle futures came to life out of the gate this morning, responding to the positive USDA Cattle on Feed and Cattle Inventory reports released Friday afternoon. The guts of the report is what were interesting, with cattle placed in June weighing 700 pounds or more dramatically below a year ago and pointing toward a possibly acute shortage of fed cattle for November-January. And placement data thus far in July indicates further placement declines.

In real numbers, the industry marketed 392,000 head more cattle than it placed in June, bringing the number of cattle on feed down to 10.127 million head, 248,000 head less than July 1, 2013.

         Shortages Ahead Too

The USDA brought back the summer edition of its Cattle Inventory report, which had been cut during the recession. Therefore the comparisons were to 2 years ago. While it showed beef cow numbers down 3 percent from 2 years ago (not surprising) it was the beef replacement heifers down 2 percent from 2012 which was surprising. The only way out of our current shortage as we already know, is rebuilding the beef herd and this report at least, doesn’t show that being as far along as many in the industry believed.

         Feeder Futures Gap Higher to Post Record High

Well the Cattle Inventory report certainly seems to have reinvigorated feeder futures back on track, along with plenty of stories of sky cash feeders in special sales late last week. August FC touched limit up at $220.97, a new record for both August and an all time high for any feeder futures contract.

         LC Higher But Taking a Back Seat

Early indications from the electronic trading book pointed toward a limit up opening in August LC, but that drew in sellers and the market ended up opening a mere 115 points higher. It then quickly sold off to slightly lower on the day and has been higher, but volatile ever since. Dec and Feb LC are holding 100+ point gains though, as the Friday’s report possibly altered the longer term view of a market that has been loath to reflect any optimism regarding maintaining prices at current cash levels of $160+.

         Speaking of Cash Prices…

Expectations for this week are for fully steady to very likely higher cash prices. Last week some packers appeared to make an effort to extend inventory well into August at prices in the mid $160s. But there still don’t seem to be enough cattle to go around. And that will be the driving force, with kills already cut back to the minimum 570,000 head and packers profitable.

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.

Packers Still Attempting to Secure Inventory; Beef Soars

Packers are out this morning still trying to secure inventory for next week’s scheduled production, bidding $163-164, as this week’s fed cattle trade spills into a second day. Despite the naysayers and because of the grinding complex, the USDA boxed beef cutout values have scored new all time highs this week, the choice up $5.75 and the select up $8.60 from a week ago. The round primal is getting close to the level scored earlier in 2014, $20 higher than a week ago. This keeps packer margins black despite the rib and loin taking it in the teeth, down $7 from last week.

         Small Kills Continue

Expectations of a 570,000 head kill this week will continue to support product values simply because the pounds of beef being produced is historically small for the summer. Talk is that next week’s kill will be no larger than this week.

         Futures Caught Between

CME Live Cattle futures continue to lag behind stout cash prices, consistent with their stance the entire year. If cash prices are still above $160 as we head into the last week of LCQ’s life, then futures will finally rally to reflect reality. But in the meantime, the market will cautiously lag behind.

         The Real Question Is…

Which brings us to the elephant in the room- where and when is the increase in fed cattle supplies? Why are we so short numbers when cattle on feed data suggested otherwise? Some cattle feeders have made a conscious decision, informed by the cheapest corn prices in 4 years, to put weight on cattle and sell them later. This obviously suggests more cattle are coming and at heavier weights sometime in the third quarter. These two bearish expectations have bears convinced they must be short in spite of the discount and certainly, under no circumstances, be long. In fact after a rally of this magnitude, no greater sin could be committed by a trader who has missed this bull, than to be caught long at the top. And that is the primary thought process keeping this bull market alive because that’s the way markets work.

This market will experience another correction and consolidation at some point. We’ll be a lot smarter August 25, than July 25. But the packers’ willingness to extend his inventory ownership well into August already indicates that it may be September before fed cattle supplies increase enough to give packers even the tiniest bit of leverage.

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.

Cash Fed Cattle Prices Trading at New All Time Highs

It started late yesterday afternoon and has continued this morning, all major packers bidding $161, then $162, with some numbers trading at both prices. Some cattle feeders are passing and pricing cattle at $165. For the first time in history, fed cattle will likely average above $160 when this week is done.

Packers are competing aggressively for a limited supply of fed cattle. With beef production down 6%, ground beef patty makers are competing for a limited supply of beef to convert to hamburgers. And the American consumer is not likely to give up hamburger anymore than he or she would give up a car (or the gas to power it) or a cup of coffee.

         Futures Still Don’t Want to Believe 

CME Live Cattle futures are placidly following this surge in cash prices, staying big discount, reflecting the collective belief that prices at these new highs are not sustainable and a top must be near. Such is the hallmark of this Bull of 2014, a realizing, climb the wall of worry bull that could be singled out as a textbook example for Wikipedia.

And the risk management community continues to look at new contract highs as a place to lay off risk, not considering what may lay in store for this market in the 4th and 1st quarters could be much higher prices than being seen today.

         Placements Historically Small

While many are concerned prices are already too high, feedlot placements for July are running over 20% below a year ago and the five year average. And August placements won’t be much different more than likely. Tomorrow’s USDA Cattle on Feed report is expected to show placements down 4% but more importantly, we will likely have marketed 350,000 cattle more than we placed, taking our total cattle on feed inventory lower. A shortfall of placements in July and August will only set up a possible “hole” in fed cattle numbers in late in 2014.  Yet, Dec and Feb LC futures have taken on heavy selling the last couple days. This is yet another example of how the industry’s bearish mind set is the prevailing one. Remarkably, August LC is only a quarter discount to Dec LC.  Talk about a bullish market structure!

         It’s Far From Over

August LC retreated to its old contract high this morning and dipped lower on the day, just as rumors of $165 cash trade bubble about. This bull market may seem long in tooth but as long as futures are grossly discount at a time when a basis change typically occurs and the bull spreads work, most experienced traders know better than to pick a top. Better to buy breaks and have patience, and see where we end up come 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.
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