The Cattle Range Home Page
January 5, 2018
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Fed Cattle Market... Stunning Disappointment

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Fed Cattle Market... Stunning Disappointment
Cassie Fish -- cassandrafish.com

CME cattle futures reversed yesterday, after making a new high for the move, raising a technical caution flag. And today, as if someone flipped a switch, futures opened lower today and fell sharply. Today’s action decidedly ended the modest rally, (only $6 in Feb LC) since December 11.

The repercussions of the futures failure are many. Negotiated cash cattle, set to trade fully steady or higher this week have traded $1 lower than last week’s $123. A few basis traders sold quickly in Nebraska and Kansas, responding to lower futures. More packers are now bidding $122 as the morning wears on, some cattle feeders are passing, despite futures that are near limit-down.

The futures break has placed the packer firmly back in complete control of the market. Packer margins will now widen back out quickly over $100 per head, as choice boxed beef cutout values rise over $210 next week, bolstered by smaller holiday kills and aggressive end user restocking. This week’s kill is not estimated at 530k-535k.

It hasn’t happened often in history, that the packer is able to break cash after multiple, consecutive weeks of sub-100k head trade volumes, but psychology is such, that for them, taking advantage of lower futures appears to be turning out to be easy.

This all speaks to the many facets of this market that have changed in the last several years. The active participation of algorithmic-based, computer-generated trading has sped up the velocity of futures price movement and volatility is one. Money flow impact being greater than fundamentals on spreads and market direction is two. Another is that many cattle feeders focus solely on basis rather than price is another, not to mention a heavily short cattle feeding industry influencing outlook. Packers controlling 74.3% percent of their needs through formulas and contracts reduces their reliance on negotiated trade is also a reality.

Layer on top of all-of-the-above the fact that all are bearish 2018 cattle prices because of well-known expansion, and maybe the futures market collapse is not a surprise in hindsight. Of course, a bearish outlook was true one year ago too. But 2017 turned out better than 2016, with the market making a higher high and a higher low, absorbing 1.6M more cattle into the supply chain. Demand fueled it and packers stepped up production aggressively and had a record profitable year. It was the packer consistently reaching for cattle to supply expanding demand that made 2017 what it was.

It only took 3 trading days into 2018 for another ‘race to the bottom’ to commence. But in reality, fed cattle supplies for Q1 are only slightly larger than a year ago. There is no reason to expect Q1 demand to be any worse than 2017. Q1 cash prices last year traded between $117 and $130 and there really isn’t any reason to expect this year go be any different. During Q1 2017, boxes traded between $192 and $223 and if anything, this year’s range will be higher, meaning packer margins could be wider.

Some analysts are pointing to carcass weights the week before Christmas, which were released yesterday as a bearish sign. But last year, carcass weights rose 8 pounds from that week to the first week of January, back up to 905 pounds. And with the clarity that hindsight provides, that proved to be irrelevant.

Available fed cattle supplies will grow significantly year over year in Q2. However, it seems the marketplace is choosing to take a bearish stance starting now. It will take the same elements of 2017, excellent demand and a brisk slaughter pace for the market to maintain the front-end currentness in Q1 that has benefited the market so significantly.

So perhaps this week’s bearish disappointment won’t actually prove to be all the bearish over the coming weeks. Giving the packer back the advantage, widening packer margins ought to support slaughter levels and encourage bookings by end users. And that is truly where it’s at.

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