Cash Fed Cattle Market on Fire; Big Saturday Kill

Despite all the worry that has prevailed in the spring of 2014, Friday proved almost everyone wrong and was a day of triumph for the cattle feeder. Fed cattle prices ended the week higher, $145 to $147, with even Texas seeing cash trade. All major packers were involved, proving once again, the more competition, the more robust the marketplace. And it was the first week of June!

Two factors contributed to this feat: extraordinary currentness of the cattle feeding industry and the profitability of the beef packing sector.

         Slaughter Exceeds Expectations After All

Last week’s weekly slaughter ended up at 614,000 head with 33,000 head dying on Saturday, exactly what the bull market doctor ordered. Apparently packers making $50 per head does incentivize increasing production. Expectations for this week are for another 610,000 to 620,000 head production week.

Boxed beef cutout values did decline last week compared to the prior week, though the rib has yet to top. Seasonal weakness in the chuck and round were prevailed and the choice cutout posted Friday afternoon at $230.85.

Father’s Day is Sunday and a seasonal top in the rib is likely near.

         June Live Cattle Futures Finally Break Out

Proving the old adage, triple tops never hold, June live cattle finally catapulted over the $140 level Friday to a contract high of $140.92, sending shorts scattering. All other live cattle months made new highs as well, as did feeder cattle futures, but it was the much maligned June LC that stole Friday’s show.

There was more than one attempt to take a shot at capping Friday’s rally by a large trader or traders, with some big sell orders thrown at the market late in the session. So despite the pit close well off the highs, the electronic trade saw futures push back towards its highs in the last 45 minutes of trade.

Today’s higher opening, posting new highs yet again, puts June within less than 100 points of filling the gap on the spot LC chart, as June gains on all other LC contracts. Feeders too are brilliantly higher.

The bull market of 2014 lives!

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 Live Cattle Finally Lead; Packers Chase Big Strings

2014-06-06_Chart1

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.