Normal Seasonal or another Fall Wreck?

Posted on:  7/10/2017

By Cassie Fish,

As the cattle and beef market settle into typical July seasonal weakness, many, if not most conversations are centering on whether the fall of 2017 will see the kind of cattle market wreck experienced in 2015 and 2016.

The magnitude of the fall sell-offs the last two years as well as the losses experienced by the cattle industry were staggering. However, there are major market fundamental differences between now and then.

A primary difference is front-end currentness. Significantly fewer yield grade 4s and 5s, smaller carcasses, less fat trim- all are friendly. Lower fed cattle breakevens are a positive, as eagerness by the cattle feeders to capture profit contribute to fed cattle marketings remain current. Summer fed kills, averaging over 510k head, have been big- big enough to maintain currentness.

Everyone knows that ample fed cattle supplies, relative to recent years, will be available from now until October. But if the last 5 weeks are any guide, the industry will move through them in an orderly fashion, supported by profitable packing plant margins and robust domestic and export beef demand, prevalent all year in 2017. The fear of course, is that the greater supply will pressure the cash fed market another $5-10 lower over the next 60 to 80 days.

Beef demand was reignited in Q4 2016 and beef has stayed in the retail mix, despite a tightening of retail margins the last couple of months. Beef has increased store traffic and rings at the register in 2017. The retailer will be back for beef during times of well-known seasonal weakness like the second half of July and again in September. The ‘dog days’ are greatly priced in the market decline already experienced. An additional $5-7 will come off the cutout this week but there is major support in the $208-210 area. Ends and grinds are holding well relative to middles, which is 100% seasonal and the rib is seeking a low in the next 2-3 weeks.

CME cattle futures don’t act all that bad today, considering the plethora of bad news and an explosive CBOT grain and oilseed rally. Last week’s lows have a target on their backs by bears. Though savvy traders can see that a big chunk of the break is already behind this market. Some are carefully watching the spreads, wary Aug LC may decide to take on this week’s Goldman roll selling as commercials consider rolling shorts further back, even though from a flat price standpoint, Oct and Dec LC look too cheap when calculating the decline in beef production from Q3 to Q4. Aug LC has stubbornly and very incrementally narrowed its basis to cash and gives no indication of doing otherwise.

Last week’s Commitment of Traders report as of the close Tuesday, July 4th, showed commercials covered shorts and managed funds liquidated longs, which could be viewed as mildly friendly.

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