By Cassie Fish, http://cassandrafish.com
The end of the week, month and quarter find CME live cattle futures coming off the high of a move that lasted almost a year. Spot Apr LC will close both lower on the week and lower on the month today. A look at the recent Q1 closes though show just how far Apr LC 2019 rallied compared to its counterparts in 2017 and 2018- thanks to the worse weather market in years. The Q1 close last year was $113.75, 2 years ago $119.95 and 3 years ago $132.92.
Solid beef demand including the expansion of exports in 2017 and 2018 along with record packer profitability all contributed to the industry’s ability to work through larger and larger supplies of fed cattle, a result of herd expansion. The long-lived futures rally reflected the positive development in underlying fundamentals. The explosive hog rally this month provided the final push upward last week, though Apr LC only double topped at its March 1 high, $130.45. The Feb LC expiration at $129.95 marked the spot high close for 2019 thus far.
Still despite a rotten winter and so many things going right, cash fed cattle prices this year did not take out the 2018 high of $129.75. Last week’s cash high was $128.96. Some believe cash prices will make a new high in April because of the declining carcass weights, but packers in the north are astutely staying long bought, they continue to gather inventory today for the delivery the week of April 15. Large numbers of formula cattle in the south have limited buying interest there to one or two packers each week, making getting cattle sold more difficult.
So, what has kept a lid on the cash market, despite the lowest carcass weights since 2014? Leverage. In 2019, we will slaughter 300k to 320k more fed cattle than 2018 and 1.88M more than in 2016. The industry will be required to slaughter the most fed cattle since 2011, back when one major packing plant in Texas was still open. It is frustrating and sobering for the cattle feeding industry that this year’s weather market didn’t result in more upside. But it is even more deeply concerning for the cattle feeder that the incoming increase in head count will give the packer even more leverage than he has had up to this point.
Considering that futures prices are significantly higher today than the last two years at this time, perhaps the rally was an opportunity rather than a disappointment.
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