Yippie, there’s no end to this. Let’s take on some partners and buy more cows! Believe it or not, I heard those exact words about a month before the “Wreck of ’74.” (Note, that is not a prediction of the future. All it means is that history has proven that a catastrophic melt down in the cattle business is possible.) — jtl, 419
From CassandraFish.comBy Cassie Fish,
Pretty much classic turnaround Tuesday action in cattle futures this morning with early strength-not quite taking out yesterday’s highs- melting into red ink. This is the third up week for LC futures since bottoming in mid-December and though the fundamental news is positive, futures are unwilling to get too far in front of the developing bullish story. Traders are cautioning that this rally is getting a little long in the tooth, and prices have returned to what is viewed as significant overhead resistance. Both facts are contributing to a “show me” attitude for what comes next.
Tops Bids Show Packer Interest; Cutout Slowly Rallies
Out in the real world packers are showing interest and early “tops” bids have moved up in some spots from $1 to $1.50 over this week’s cash trade. Cash this week is widely thought to develop $2 higher than last week which averaged $165.79 with outside tops of $169 live and $267 dressed. Spot Feb LC is content to trade par with last week’s average while the futures market structure is classic bull, with discounted futures prices all the way down the line. Cutout prices are increasing at a very modest pace although there is plenty of time for the seasonal rally to unfold in the beef market.
Where’s the Bull Gone?
As far as this bull market has come in the last year there has yet to be a blow off top, or premiums built in the futures market or widespread irrational exuberance. Only the cash feeder cattle market a few months ago had the earmarks of a major top, as prices defied gravity in the midst of the promise of a record corn crop. This was followed by a punishing break which pretty much sucked the bullishness right out of the 2015 futures market price structure.
Caution Rather than Optimism
We begin this year with an orderly up trend accompanied by fear or at least a widely held doubt that the market can’t sustain itself above $170 and perhaps it was discovered how high too high was in 2014. The logic behind this is based on an assumption boxed beef prices will be unable to easily pierce $260 and return to the record high set in July. And packers, who were miraculously able to make money at record high prices in 2014, will be unable to repeat such a feat in 2015, cutting kills and forcing cattle feeders to carry cattle and lose currentness. This belief, in a nutshell, explains the futures discount and promotes the willingness to sell rallies- in spite of supply data that clearly indicates fed cattle supplies will remain quite tight historically until well into the second quarter.
Beef Demand Test
This sums up the battleground for the next few months. The wild card is beef demand, which did nothing in 2014 but blow every bears mind. Expectations for beef demand for January are quite conservative though offerings are small, compared to a year ago and any other time in history, yet no one expects a wholesale beef rally of last year’s proportion. Making the January wholesale beef market the key to setting the stage for how 2015 unfolds.
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