By Cassie Fish, http://cassandrafish.com
CME cattle futures, very overbought technically, are quietly holding gains near yesterday’s highs. Open interest has been dropping for weeks, now down to 325k contracts, only 12k above the low in OI scored in early August. Declining open interest on a rally removes some of the power of that move from a technical standpoint.
Cash trade is thought to take place tomorrow, though the volume may not be as large as last week’s 93k head trade. Fed cattle supplies in the south are certainly ample, but the extremely large Saturday slaughters scheduled by packers have managed to keep supplies from becoming overly backlogged.
Beef is still showing up in weekly retail ads, but it is no longer grabbing the spotlight, forced to share with pork and poultry. Plus, prices are edging higher. Wholesale beef prices were higher this morning but seasonally the low is the first week in October on average. Now that prices are back to pre-fire levels, the cutout could decline a little more over the course of another week, but that would be normal.
With all but Oct LC carrying big premiums to cash, and having posted a massive rally off the low, the obvious questions traders are asking is whether some sort of correction is imminent. Knowing cattle futures, some sort of choppy sideways action over the course of the next few weeks will likely encompass some of the correction. And given the times of today, an event of any sort could send markets tumbling at the drop of a hat, also resulting in a correction.
It’s difficult to say how much cash prices will actually rally, given that extra cattle can only be slaughtered on Saturday, and in the south, more market-ready cattle are coming on showlists in October. In the north where there are many more empty pens and more slaughter capacity, cattle feeders are more likely to take their time in selling cattle going forward. Still, the truth is there is no shortage of fed cattle for Q4 and there never was. Therefore, a big rally in cash fed cattle prices seems unlikely, at least in the short-term. At some point, that fact may reverberate with Dec LC.
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