Spreads Turn As Market Declines

By Cassie Fish, http://cassandrafish.com

In the early days of the COVID-19 crisis, the deferred live cattle and feeder cattle futures looked like a bargain buy to some with an optimistic few of the second half of 2020. But as the crisis wears on, that viewpoint is changing and today deferred months are losing to Apr and Jun LC for a second day. All contracts have made new life-of-contract lows except Apr LC.

As the markets await the announcement of an economic stimulus package from the U.S. government to cushion the blow of sharply reduced travel and restaurant visits now that there are dozens of events canceled daily, losses have compounded today. Equities are down 18% from their highs as is Jun LC, now holding the majority of cattle open interest.

Open interest has dropped big this week, almost back to the low made February 11. The drop in OI, oversold technical indicators and likely net short managed fund position make it a scary proposition to sell the market here. On the other hand, the world has not faced a health crisis like this in modern times in this highly mobile society. Medical experts estimate the U.S. is 3 weeks out from the peak in COVID-19.

As futures and equity markets continue to dial in more downside, cash market players have begun to shorten up buying cattle and beef well into the 0-21-day spot window. More business is being done short-term because no one wishes to get caught with a lot of physical inventory in such uncertain times, certainly understandable.

Today, negotiated cash cattle trade occurred $3 lower than last week at $110, giving the futures market a boost and cattle feeders some hope. About 11k head have traded that way in the south a few thousand in Nebraska, also at $175 dressed. One major packer backed up their bid to $108 after securing some inventory.

Boxed beef prices are just holding steady. Initially a surge in volume at retail and club stores was noted, but now growing concern about the undeniable slow down at hotels, restaurants and institutions like colleges or large companies like Google is beginning to cast a negative shadow over the beef market and all protein. Many colleges have advised students not to return after spring break and to complete the term using on-line methods.

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