Posted On: Â 7/25/2016
By Cassie Fish, http://cassandrafish.com
CME cattle futures gapped higher this morning, gained triple digits quickly and most active Oct pegged limit-up in the second hour of trading. Fridayâ€™s USDA Cattle-on-Feed report seems to be the impetus for the rally with placements 3% smaller than expected but to be accurate, many were already optimistic a bottom had been made Thursday, after last Fridayâ€™s futures rally. The cattle that were placed mostly weighed over 800 pounds, a trend expected to continue, and the number of heifers on feed has creeped up 5% over a last yearâ€™s historical low percentage.
Futures handily cleared the 10-day moving average and spot Aug has moved within eyeshot of last weekâ€™s high of $112.92. The 40-day moving average lies just above last weekâ€™s high at $113.36 followed by the high posted 2 weeks ago of $113.50. If the market has truly bottomed, these chart points will be easily overcome this week so that the real work of clearing the $114.50 to $115.35 can get underway. It is the final week of July, a seasonally significant time period for cattle market bottoms. Reams of fundamental analysis from multiple sources insist that the long-lived futures market discounts are on their way out and a narrowing of the basis is on its way in.
Along with a call for a bottom in futures last week is a call for a bottom in fed cattle prices as well. After making a new low for the move, fed cattle prices are expected to be higher this week, beginning to work their way back into the $120s for fall. A regional packer has already bid $185 dressed this morning, compared to trades last week as low as $181. Packers do have a significantly greater number of forward contracted cattle to draw upon beginning next week than they did in July and only 15k less than August 2015.
Boxed beef prices are expected to sink a little lower again this week before bottoming between $196 and $200 on the choice, which points to some margin contraction for the packer. This weekâ€™s kill is pegged to be 595-600k. Average retail prices as reported by the Wall Street Journal last Thursday did increase as retailers back away modestly from the aggressive June/early July pricing. Competing meats remain cheap and plentiful which is not expected to change.
The test for cattle futures is clear this week. Either the market continues to overcome overhead resistance and confirms this is bottom or the market is unsuccessful in its attempt and disappointment replaces todayâ€™s optimism. Stay tuned.