The Cattle Range Home Page
November 14, 2017
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Good News Hard To Find

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Fed Cattle Market... Good News Hard To Find
Cassie Fish -- cassandrafish.com

Regardless of what market indicators are considered, good news is scarce this week. Charts look toppy and technical indicators are well into the biggest correction since the market bottomed in September.

Most active Feb has retrenched today to prices seen in late October, when the market experienced the first week of the two-week sharp rally. Feb is still above its 40-day moving average which happens to correspond with its former contract highs, making the $123 level one of import.

During the $23.82-rally the market has just completed- from September low to November high- open interest has grown 78k to a hefty 386k contracts, as managed funds and swap dealers piled on longs after longs. Today is the highest OI has been since June.

Because of the fund buying this fall, feeder cattle futures and summer live cattle futures rose to much higher levels than anyone dreamed possible given the fundamental outlook. But rally they have and cattle feeders answered by laying off risk.

The volume of cash feeder cattle moved the past two weeks has been the largest two consecutive week volume since 2013 and the cattle feeding industry has found both trucks and empty pen space scarce. The concrete evidence of larger fed cattle supplies in 2018 as placements pile into feedyards has arrived and with it an increase in bearish sentiment.

As an example, the Dec/Jun LC spread narrowed from $6.80 the first week of November to $0.75 last week. This occurred when Dec LC, pummeled by the roll and weakening cash outlook while Jun LC seemed oblivious to any fundamental influence.

Boxes Struggle

The early fall strong rally in boxed beef values led by the rib has run out of steam too, with choice topping last Thursday at $213.85, just shy of an average Q4 rally on a percentage basis. Boxes are expected to lose $2-5 this week and it remains to be seen if a secondary rally in late November/early December will surface. This week’s kill is estimated to be 628k-632k.

Cash Cattle This Week and Beyond

Some cattle feeders, sensitive to the basis, are likely to attempt to sell cash slightly premium to futures this week. If futures keep breaking, then they could chase futures lower. Packers, knowing boxes need to get cleaned up and that cattle feeders are in sell mode, will be stingy with bids. This scenario would seem to point to weaker cash this week, perhaps $118 to $120.

When considering the size of the open interest, the bearish sentiment of the cattle feeder, the chart formations and the stalled boxed beef market, it appears that the Q4 top is in and the market will work lower the rest of the 2017. There certainly may be a Thanksgiving week rally if packers need to replenish inventory to supply the post-Thanksgiving week kill, which will need to be ample to supply holiday sold-aheads. Furthermore, the seasonal spot top in ribs does not occur until the first week of December, so a secondary rally could be in the cards.

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