By Cassie Fish, http://cassandrafish.com
Aug LC resumed control of the cattle market today, making new highs for the move and reaching the highest level since March 19, while the Aug/Dec spread tightened to a level not seen since March 6. It’s only Wednesday, and market action of late has been a fickle -but given the calendar and the discount structure of this market- this time the rally may be for real and the basis will continue to narrow.
The Bigger Picture
On a spot futures market basis, today’s push in Aug LC to $109.15 fell short of Jun LC’s high the last week it traded, which was $109.90. Beyond that point is Jun’s spot high during June of $110.65. That same area, $110.10 in this case, was the Apr LC spot low during April, which adds importance, so that a close above that area on a weekly basis is potentially powerful. Doing so will open up the topside and leave the $102 to $110 level as massive support long-term. This price area corresponds with last year’s cash low of $104 and this year’s current cash low of $106.
This broader technical picture adds to the drama of this week’s futures market action as it would seem only a matter of time before the summer low is more clearly defined and the market’s attention begins to focus more on post-Labor Day smaller supplies and seasonally improving demand.
The last three years saw post-Labor Day lows but this year the distribution of the fed cattle inventory was more traditionally weighted to May, June and July rather than later in the year. Late year bottoms are common in the early years of a bear market cycle and it’s been almost 4 years since this bear market began. Carcass weights are no longer burdensome and demand may be close to the best in history.
Friday’s USDA Cattle-on-Feed report will once again reflect that 2018 continues to have historically large numbers of cattle on feed, thanks to aggressive beef cowherd expansion that began in 2015. But expansion has slowed to a grinding halt, as this Friday’s mid-year USDA Cattle Inventory will likely show and the big year over year increases in cattle supplies is slowing also, with 2019 likely to see only small growth. At some point, the market will begin to reflect this.
Today’s futures rally is bolstering asking prices for fed cattle as such, cattle are generally priced at $114 or higher, at least $3 higher than last week. It’s well-known that last week’s small negotiated trade volume resulted in packers burning some inventory this week which increases their need to replenish. More than likely packers will stall and hope futures once again fail on a rally late week, which would make their job much easier. But will the gamble pay off?