By Cassie Fish, http://cassandrafish.com
CME cattle futures established what could be the top of a developing trading range last Thursday, followed by a sharp sell-off last Friday, establishing a low that so far has held. Because the market has had such a steep rally that lasted 6 weeks, most traders want to buy a ‘real break’. Problem is so far; one has not presented itself. All the while the underlying market fundamentals have continued to strengthen.
Cattle markets prefer to trade sideways once value has been reached. Certainly, Dec LC at $113.77 is not overvalued considering a year ago Dec expired at $124.80 and spent its time above $117 once it became spot. In 2018 Dec expired at $123 and in 2016 at $119.
The fundamental pattern dominate in 2019 continues; cutout values trading above a year ago, record packer profit margins, slaughter levels above a year ago, carcass weights below a year ago.
Fed cattle prices have lagged year ago levels since the packing plant fire and this week, unless cash trades $113 to $114, negotiated cash prices will fall short again. The seasonal is strong for higher cash cattle prices this week and next. Showlists are down. Next week’s slaughter is expected to be 650k head, indicating packer demand for cattle ought to be brisk. But having one major packer out of the market continues to limit packer competition. That will change by year’s end.
Since the fire, the cattle feeding industry has done a great job of marketing cattle just as the packing industry has broken capacity utilization records slaughtering cattle. Domestic beef demand it can be convincingly argued, is the best in history. One has to look hard to find a bearish fundamental argument.
Friday’s USDA Cattle-on-Feed report is not expected to contain bearish news. Pre-report estimates are cattle-on-Feed 98.9, placements 101.5, marketings 101.1.
Oct LC is being pressured by the tendering of 29 additional deliveries by feeders in the south. It would appear these feeders are unhappy with their regional basis. Since the north trades the majority of fed cattle each week and more cattle are slaughtered in the state of Nebraska than any other, the CME live cattle futures market is tasked with reflecting the dominate fed cattle market. Last week’s 5-area average, which included the $108 trade posted in the south, was $109.73.
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