By Cassie Fish, http://cassandrafish.com
CME cattle futures are spending another day consolidating, catching up with themselves after a blistering rally two weeks ago turned into a big break last week. Once again yesterday Jun LC lost open interest a sign that a trickle long liquidation is occurring which can slow the descent.
Today, Apr LC has gained on all other contracts and is trading slightly premium to last week’s cash which is giving some cattle feeders hope and is frustrating basis traders wishing for Apr to go discount to cash.
Last week, northern cash cattle prices firmly took the lead from the south, which is pretty seasonal anyway. But this year, with a large offering of market-ready fed cattle available in Texas and Kansas beginning this month, the south will lead the cash market downward while the north fights to get $1 more than the south because numbers there will remain tight for at least another 4-5 weeks.
Packers are hyper-aware of all of the above and continue to methodically keep a lot of inventory around them using formulas, contracts, and cattle bought in the 15-30 days window.
A Fundamental Check-in
So where are we seasonally? The two charts below show the likelihood that cash cattle topped 2 weeks ago and boxed beef prices did as well. Cash cattle prices usually have an uptick in late April before a more significant down in May. Some believe this year is an exception because of the weather market. But the sheer numbers of fed cattle coming on for summer- the largest since 2011- may well dominate the market and minimize the weather market’s impact.
Insert cash cattle chart
Boxes typically pull back into the third week in April before bottoming and staging a seasonal rally into May. This rally can sometimes sustain into June but that might be a steep ask for 2019, since the fed kill will exceed last year.
The market knows what lays before it. Peak seasonal beef demand which will prompt the need for bigger kills. Packers intent on expanding margins back over $200 per head in May by raising beef prices and kills and breaking cash cattle prices. The lightest carcass weights in years, which will bottom next month should create support for the market in many traders eyes. But the knowledge that fed cattle slaughter capacity will need to expand beyond 2018 levels- and operate at a higher capacity utilization than in years- is just as worrisome for others.
This year will be like none in the past and though it’s tempting to look back at the weather market in 2017, the industry must slaughter hundreds of thousands more fed cattle in 2019. Demand expanded rapidly in 2017 and 2018 and though still good, export growth has slowed thus far this year.
The most useful information to succeed this year may be found in the first 3 months of 2019. Packers managed the year’s tightest fed cattle supplies and a weather market that began last December with success, keeping cash prices under last year. This year holds the potential for record profits for the packing industry and that is high motivation for them to continue on the same path of buying cattle with time and managing margins and slaughter to their full advantage.
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