By Cassie Fish, http://cassandrafish.com
Texas and Kansas negotiated fed cattle trade got underway this morning at $121 in Texas and $122 in Kansas, a fat $2 higher than last week. The north, where most April cattle are dead and May calves are being offered for sale green, and at higher money, has yet to trade. Despite the board weakness, cash is expected to be higher in the north as packers gather inventory for next week’s bigger kill.
The south is where the numbers are expected to come on big in formula yards during May and June while numbers in the north will be more skewed to June and July. There is palpable fear among cash sellers in Texas especially, as slaughter slots will be taken up by formula cattle as offerings swell.
The well-anticipated fed cattle supply increase continues to influence cattle futures more than any other factor and is the sole justification for the wide gap between cash and Jun LC, at $19 back. Bears must see cash prices plummet in May to justify a big move lower in Jun LC. Short hedged basis traders are expected to lead the down in cash.
This is all playing perfectly into the packers’ hands as they are intent on ramping up kills, filling orders and expanding margins. They are quite adept at taking advantage of bearish market psychology and go first to those sellers that are easily tripped on a weak futures market. This is why the packer starts each week’s trade in the south and will continue to do so.
CME cattle futures are fading today’s higher cash trade with most active Jun LC taking out its 10-day moving average. The larger question is whether this is the beginning of another downtrend or instead, the beginning of sideways action. For one thing, cattle futures prefer to trade sideways. Last week’s low of $101.20 stands out as a key support area. It’s just as possible this market chops and churns sideways between $102 and $106 during the next 4 weeks as it is that another test of $97 is in store. That is the dramatic low left April 4th when cash was at $117. Cash prices will begin to decline consistently in May, but how quickly the decline occurs and when the cash support of $117 is taken out will have a great deal of influence on Jun LC.
Don’t forget tomorrow afternoon’s USDA Cattle-on-Feed report could influence Monday’s CME cattle futures trade too. Expectations for a the first of many bullish placement figures will be supportive of Dec LC, which in turn will be supportive of Aug FC. Managed fund shorts hold a monster position in CME feeder cattle futures, just one more factor to make trading less of a slam dunk than supply bears would like.