The Order of Things

Posted On: 05/09/17

By Cassie Fish,

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.

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