Let’s Go Discount!

By Cassie Fish, http://cassandrafish.com

CME cattle futures resumed their catastrophic, no holds barred sell off today. This monumental meltdown, inspired by bearish USDA Cattle on Feed estimates last Friday has snowballed and effectively crushed this market. Most active February LC has fallen $12.82 in 5 trading days. The next area of support appears to be the 2014 high of $172. Yesterday’s positive action put out some ‘bottoming’ vibes. Those were obliterated today.

Present day commodity trading is computer fast and a connection to the underlying commodity stretched so thin as to almost be nonexistent at times. Because of the wide daily price limits and margin call pressure and the inability of individual traders to ‘play ball’ with funds and algorithms, the market easily free falls. No one wants to be run over so they simply and strategically step aside, waiting for the dust to settle. There is no fundamental reason for today’s massive break. But traders know that until the market has exhausted the selling, prices will continue to fall. Fear and self-preservation are strong deterrents from participating in a long in the tooth blood bath.  

It appears to have been insufficient to simply remove the bull market premium. The entire strip with the exception of December 2024, has determined going discount to cash ($180 to $181 traded today) is necessary. It’s worth remembering that during covid, futures traded nearly $20 discount to where cash bottomed a few months later. The 5-area average has ranged from $180 to $185 for the past 6 months.

Packers had purchased about 10k head coming into today but more trade occurred this morning in the south at $181, before packers backed up bids to $180. The futures meltdown has made cattle feeders easier sellers and packers have been able to cheapen their cattle costs substantially in one week, $4 to $5/cwt. Prices are weaker because of fear, not because of an increase in supply of choice, market-ready fed cattle.

Cheaper cattle costs will improve packer margins since boxed beef prices have been struggling for weeks around the $300/cwt area for choice. Seasonal and substantial weakness in the chuck and round this week have offset higher rib prices and kept cutout values flat to soft.

Everyone continues to puzzle over how there can be more cattle on feed than a year ago. It’s a combination of three elements: 1) the slowed marketing pace in 2023/more days on feed/feeding cattle to heavier weights 2) more Mexican feeder cattle placed 3) more dairy cross cattle placed. Keep in mind more is relative here. 2023 fed cattle harvest will be down 1MM head from 2022. 2024 harvest ‘might’ be 100k to 200k head larger than 2023 for the reasons above—not because of more beef feeder cattle. In 2024, fewer beef cows will calve than 2023. The industry as a whole is not retaining replacement heifers. What has essentially occurred is the big supply drop has been ‘floored’, but ultimately, the industry must retain heifers and rebuild the herd to alter the long-term macro outlook.

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