Volatility Begets Volatility

Posted on:  5/16/2017

By Cassie Fish, http://cassandrafish.com

The dramatic turn of events the last 2 weeks have left many in the beef industry a bit shell shocked. The velocity of the rally took most by surprise and the steep and relentless nature of the current cash cattle and futures break is having a similar effect. Friday’s ‘gift’ rally now seems like a dream.

End users haven’t been let out of the trap yet, as the choice cutout value was pressed to new highs yet again today, ringing the bell at $250. Only those with no other choice are buying any product now as all are aware prices will come tumbling down soon.

It will be a long time until the cutout bottoms following a rammed and jammed rally like this one that will make the Q2 top. The rib primal and beef 50s have reached their highest prices ever in history. Talk on the street is that pork business is booming and beef will pay the price dearly this summer. Beef’s turn in the “preferred” seat is over for now and it could prove to be a long, long summer.

About two-thirds of the time the cutout bottoms in Q3 the rest of the time in Q4. Since people tend to have short memories, it is easy to recall the enormous, record-making cutout breaks of 2015 and 2016 that took until Q4 to end.

Today’s lighter carcass weights and current market-ready fed cattle supplies ought to provide some positive balance to the seasonal decline in cattle and beef prices now upon this market. This makes slaughter levels and carcass weights the two most important fundamental factors to watch carefully this summer, to attempt to gauge the degree and duration of the decline.

Going forward, the market will be battling the loss of the large sold-ahead position that laid the groundwork for the great rally that just expired. Instead, the wholesale beef market will be forced to clear its volume more in the spot and formula market and because prices are so high, volumes will be constricted. This has been very evident in the USDA Comprehensive Boxed Beef report issued the past two Mondays.

It is stating the obvious that it will take cheaper prices to find beef demand again. How long and how low are unanswerable today. Cattle feeders will chase basis to stay in the front of the decline and the live cattle futures market, burdened with a record long fund position, will lead the parade lower.

Copyright © 2017 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.

Downtrend Resumes

Posted On: 05/15/2017

By Cassie Fish, http://cassandrafish.com

The enthusiasm related to the late week announcement regarding the opening of U.S. beef access to China faded over the weekend and the downtrend in place since the May 4 top, continues today.

The markets focus today is solely on expectations of lower cash cattle prices this week and an imminent top in boxed beef prices. Some boxed beef items have reached record high price levels and a correction will be underway shortly, with an extended downtrend that will stretch well into the summer.

The rib primal reached the highest level in history last week and the high prices will reduce the number of aggressive features going forward. Various end users are still being forced to pay up to meet immediate needs but when the opportunity to turn the table presents itself, it will be met with a great deal of enthusiasm.

Cash cattle prices dropped a big $7 last week, mirroring on the down, the big up seen earlier this month. Showlists in the south are increasing modestly and packers are planning on buying cattle another $3-5 lower this week.

Packers stepped the kill down a bit last week, coming in at 609k and this week looks to be the same as they make an effort to stabilize and expand margins the remainder of Q2.

As far as CME cattle futures go, last week’s lows are an important chart point and if and when penetrated, sets up further decline. The market is not oversold and the 40-day moving average is dollars away. But with cash prices still above $130, futures will likely trade in a back and forth fashion rather than straight down. The contract with the most vulnerability is Aug LC, with open interest above last year and the summer lows several weeks away.
Copyright © 2017 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.

Take No Prisoners

Posted on:  5/11/2017

By Cassie Fish, http://cassandrafish.com

Jun LC futures have lost an astounding $13 in one week. A gap on the spot daily chart, left by the Apr LC, between $120.47 to $120.65 looks likely to get filled, as the market seeks support at some level.

The charts look especially ugly after the market posted a second outside day today in a week, plummeting to new lows again. The market seems intent on retracing back to the level that the rally began in earnest, the $118 area. Futures are far from being oversold.

Futures have left cash behind for now, though cash prices are a good $6-8 lower than a week ago. Now that packers have regained control of their inventory position, they will step the live market down every week they can, widening their operating margin.

At the same time, packers are ramming and jamming the cutout to new highs, pushing some SKU’s to record highs. Such a desperation rally will result in a violent correction at some point, likely beginning next week.

Cattle feeders are back on their heels trying to acclimate to their dramatic change of fortune in such a short time frame. There aren’t a lot of cattle that need to be sold immediately and many cattle could use another 2-3 weeks on feed, but cattle feeders do have a lot of cattle on feed with summer out-dates and what price these cattle will trade at down the road is a guess. Summer low predictions range from $110-124.

The broader question of whether the historically wide basis held by this market most of 2017 will continue or begin to narrow. This topic is getting a lot of conversation but results in little consensus. What is agreed upon is that if and when basis narrows dramatically, it would set off a chain of events that would impact everyone who trades this market, especially those managing physical inventory.

The Beef will return on Monday.

Copyright © 2016 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.

Pressure Is On

Posted on:  5/10/2017

By Cassie Fish, http://cassandrafish.com

CME cattle futures continued locked in their downtrend this morning, now making new lows for the month. The market manages to stage a few intra-day rallies but stays negative all the same. Last week’s skyrocket rally has been replaced by growing acceptance the Q2 high, which exceeded 2016 highs with ease, has been established.

With widespread expectations that a top in the boxed beef cutout is imminent as well as lower cash prices this week being a given, futures, despite the discount, are taking the path of least resistance. Bear spreads are working on the break.

Today’s mid-week on-line fed cattle auction trade was $138-140 compared to last week’s 5-area average of $144. Volume was small and some cattle did not sell.

The focus has turned to when and where the summer low will be made. Since the rally in wholesale beef prices have reduced the motivation to feature beef, and summer fed cattle supplies will seasonally increase, logic points to lower. Unfortunately, it’s difficult to predict how low the market will go and most fall back on using historical averages of an 18% decline or so from the high. At this point, most traders and analyst look for a late summer low this year, expecting August/September to see the largest supply.

However, the still-extremely-wide-basis will keep the incentive to sell cattle ahead of schedule very much alive and in play. Many June cattle have already been sold and as long as the basis provides the carrot to sell cattle early, expect cattle feeders to continue to do so.

Normally packer margins expand going forward, with the drop in cash cattle prices outrunning any weakness in beef prices- and that should be on tap. Right now, many throughout the supply chain are simply trying to manage the big changes in p&l. Some items are in short supply and garnering nosebleed prices such as beef 50s. Other items are backing up at the packer level.

Carcass weights won’t begin to seasonally increase until June and this year may see a very slow rise in weights due the high number of cattle that have been slaughter 100 to 200 pounds below their projected out-weight. This fact will provide some underlying support at some point for this market. But for right now, the packer has regained the upper hand and cash will quickly retreat in the next few weeks, likely back to where the explosive up-move began, in the low $130s.

Copyright © 2016 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.

The Order of Things

Posted On: 05/09/17

By Cassie Fish, http://cassandrafish.com

Typically, when the cattle market turns, it’s futures first, then the live then the boxed beef cutout. Whether a bottom or top, that tends to be the order of things. Traders are examining the futures market action with a critical eye to determine whether futures did, indeed, end one of the most dramatic 6-month bull run’s last week- or not.

The rally was historically extraordinary, and analysts have had to dig back through the record books to fine one comparable. There are multiple ways to measure, but suffice it to say, a move of that magnitude happens very infrequently.

Last week, cash cattle prices rallied back close to the $147-149 area that was major, critical support the summer of 2015. It took the market almost 2 years to retrace to that level. When the cash market took that area out in July 2015, it was the signal that the market was in serious trouble, regardless of historically tight supplies. It has taken months of excellent beef demand, big kills and aggressive marketings to create the market environment to allow prices to reach this level. And as current as the cattle feeding industry is, this price level looms as significant long-term resistance.

The fuel of this move has been beef demand. The cheap wholesale beef prices reached in Q4 2016 stimulated retail beef features at the lowest prices in years. The consumer responded by buying more beef and the supply chain hummed along effortlessly for months. Cheap wholesale prices are no longer the case now that the cutout has reached the $240-250 level. Of course, the packer needs every dime of the cutout increase to offset the dramatic increase in his primary expense, fed cattle. This boxed beef rally has now exceeded an average Q1 low to Q2 high in the cutout on a percentage basis, so the again the probability is that the Q2 cutout top may occur in May this year, though a sustainable down probably won’t begin until post-Memorial Day or even past mid-June.

Last week, when cutout values were still in the $230s, boxed beef sales volumes declined in all categories- spot, sold aheads, export.  The nice margin enjoyed by the retailer is gone as is the interest in booking out-front at these price levels. True, there will be fill-in buying at these higher levels over the next month, as Mother’s Day, Memorial Day and Father’s Day typically see good beef movement to the consumer. But after that timeframe, the dog days of summer signal a seasonal slow-down.

Boxed sales volume may have sagged but negotiated fed cattle volume soared the last 3 weeks. Cumulative negotiated trade volume for the last 3 weeks is the largest since 2013, at 446,438 head. That ought to give packers enough leverage to break cash this week. If it weren’t for the need by some packers for cattle that will grade upper 2/3rds choice and the lighter carcass weights, cash wouldn’t have rallied as much as it has and would break by multiple dollars. Still the probability is that cash cattle prices will begin to work lower seasonally going forward.

Which brings the focus back to CME live cattle futures and their still large discount to cash prices. How much and how quickly cash prices decline will obviously have a great deal to do with how cattle futures perform. Technically there are numerous indicators that suggest the market has topped despite the futures discount to cash. There are multiple other factors in play too, such as the fund rollover and money flow. Aug LC now has the largest open interest of any cattle contract month.

Copyright © 2017 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.

Spreads Correct; Volatility Continues

Posted On: 05/08/2017

By Cassie Fish, http://cassandrafish.com

The extreme move in the bull spreads last week is being followed by a correction today, with the back months gaining big against the Jun LC. Perhaps the big discounts held by the deferred live cattle futures is providing support there too. All action is in keeping with the fact that last week saw the rubber band stretched to an extreme.

Packers finally got enough cattle around them last week, buying 158k head, though 33k were purchased with 15-30 days to pick them up. That is three weeks in a row of big trade volume and it would seem the packers went to the mat to extend inventory through the month of May partly so they would finally be able to regain control of their input costs. Look for cash to be steady at best and likely lower this week. The real question is how much lower.

At the same time, packers are muscling boxed beef cutout values higher, with the choice posting $240.48 this morning. This week’s effort will attempt to push the cutout another $5-10, though with the rib primal at the 2015 spring highs, help will need to come from other parts of the carcass. Beef 50s too are the highest they’ve been since 2014, clocking in at over $140 on the daily quote.

Talk is much more prominent that retailers are raising beef prices and will continue to do so in response to the big up in wholesale values. Much cheaper pork and chicken features will be in the mix now and going forward, so consumers have a more affordable alternative. It remains to be seen how these moves will impact clearance to the consumer. It will likely reduce beef sold-aheads which will be seasonally impacted anyway for post-Father’s Day, June 18.

Futures volatility will likely stay high for a few more days as it takes time for the drama to die down. Some are wondering if this is all the break the market is going to give bulls an opportunity to get on board. Indeed, front-end cattle supplies are extremely current. But after a dramatic move like the cash and futures markets have seen the past 5 weeks, a period of consolidation and correction would seem more likely than other immediate run to new highs.

The market has not yet begun to fully integrate the multiple implications of cattle and beef prices moving to the highest levels since 2015. That is simply going to take time.

Copyright © 2017 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.

Reading the Signs

Posted on:  5/05/2017

By Cassie Fish, http://cassandrafish.com

There were plenty of indications yesterday the June live cattle futures contract was in the final stages of an exhaustion rally. For one, the spreads, which had blown out enormously began to come back in. Jun LC’s discount to the sharply higher cash price this week applied excruciating pressure to those short, so instead of blowing, they rolled their position to the back months, willing to pay any price to do so. The Jun/Oct spread blew out from $5 to over $14 during June’s extreme up-move. That spread is back under $10 today.

The CME Group raised margins on cattle contracts, also another sign that for now, this enormous futures blow off had concluded.

There was a great deal of talk that some short hedgers had maxed-out bank lines and were forced to blow hedges. How much of that actually occurred is unknown, but it is the type of rumor that accompanies a blow off of this nature.

Cattle options volatility blew out to 33%, also a record. Live cattle futures posted record volume and open interest this week on more than one occasion.

In 9 trading days, Jun LC advanced $20.12. Students of cattle futures have to look back to 2003 or the 1970s to find a rival. Looking at a spot daily chart, it has the appearance that Jun LC checked and failed to fill the gap left by Apr LC on its last trading day at $136.27. Of course, there is plenty of time left for Jun LC to make another rally attempt, if cash prices are able to hold at least some of the last 2 weeks’ huge gain.

It’s an easy to argument to make, that if cattle futures had not been carrying such a historical large discount to cash in 2017, a rally of this degree would not have occurred. The big basis incentivized cattle feeder to sell cattle ahead of schedule and great beef demand and profitable packer margins made the aggressive through-put a breeze for the entire supply chain. But the ease of this flow was not evident this week for the packer for the first time in a long while.

After the mad scramble of negotiated trade this week, packers may have finally gotten enough cattle around them, even if green, to take cash lower next week. They may have more success breaking cash than getting boxed beef cutout values high enough to restore margins. Demand for beef this week has been terribly sluggish at the forced-higher-prices.

Obviously, a downside correction has begun and there is a great deal of discussion about how much this market will back up. But with Q4 cattle prices $30 under this week’s cash fed cattle prices, futures may not be where the biggest downside risk lies.

Copyright © 2017 The Beef Read. All rights reserved.
The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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