By Cassie Fish, http://cassandrafish.com
CME cattle futures are following through to the downside today, so far, all contracts except Oct feeders, have held last week’s lows. The more technically overextended 2018 contracts have come close to last week’s lows and a trip back to the 40-day moving averages below does not seem out of the question on this correction over coming days.
Though the spread action in live cattle futures certainly does not reflect the facts in last Friday’s USDA Cattle-on-Feed report. That report contained a stellar marketing number and identified large placements of heavy feeders against the January and February timeframe. Yet Oct and Dec are taking the brunt of today’s down while the 2018 contracts, carrying substantial premiums to current cash, continue to attract buying interest by someone.
It is also true that Dec LC’s premium to cash last week was historically wide at over $7. Dec LC is where the bulk of the open interest resides, so it’s understandable that it is under pressure but Oct, par with last week’s cash trade, is once again losing ground on the spread to any 2018 contract.
There is growing worry that these premiums, though under the 2016 cash market highs for those corresponding months, will cause cattle feeders to carry cattle longer, adding tonnage and reducing leverage. For now, the buyers of the 2018 contracts remain unfazed by bearish prospects. A lot of cattle will be placed between now and the end of the year against 2018 and 2017 will close out with the largest number of cattle on feed in 5 to 6 years. Front-end currentness and the distribution of the out-dates of this inventory will be critical.
Excellent Comprehensive Report
The last two weeks have seen the two largest consecutive weeks of beef production in 2017 and since 2013. Monday’s USDA Comprehensive Boxed Beef report illustrated that large production was met with excellent demand as volume increased while prices edged up a bit.
This week, the rib primal has finally found some life, up almost $10 from a week ago yesterday and the highest since mid-August. The chuck has been doing much of the heavy lifting for the cutout as of late, while the loin has yet to find its footing.
All in all, it appears the cutout has established a Q3 low this year and a gradual seasonal uptrend in in its early stages.