Feeder cattle futures have become the poster child for the anxiety now plaguing the cattle market. This morning, they plunged over 300 lower, making new lows for the move and reaching the lowest level since last June. The worry of relatively high-priced breakevens on feedlot inventory coupled with the large sums of capital now required to run the cattle business seems to be manifesting in feeder cattle futures, where the technical picture is bleak, the liquidity poor and the outlook uncertain.
Live cattle futures can’t ignore feeders, even though they’d like to, and each time feeders dump lower, fats slide. Only spot Feb LC remains tethered, albeit loosely, to the real world and gains in bull spreads, Feb now more than $5 over Apr, proof that some logic still prevails.
Negotiated Trade Can’t Be Pushed Into Next Week
Packers must enter the negotiated market this week and replenish inventories from a limited pool of market-ready fat cattle. But like any astute trader, packers hope to use the lousy futures action to their advantage, even though the volatility of late could work against them at any moment, if futures were to find footing. Futures are currently attempting yet another come-back from the brink at this writing and if Feb LC can trade above yesterday’s high, cash could end up higher for the week. The tightness of supply “should” be enough to warrant higher prices, but the market psychology reflected in the futures market, for better or worse, can’t be ignored.
Boxes Stabilize; Exports Disappointing
Boxed beef values have stabilized for a moment and though beef exports aren’t great so far in 2015, down 15% YTD according to *MP Agrilytics, certain sales segments aren’t all that bad for some packers. There is likely a greater P&L variation from one packer to another currently than usual, making competition more uneven and the overall market more mottled to read.
A Reaction to an Action?
Aside from the financial exposure in the cattle feeding industry contributing to an underlying sense of anxiousness, it’s difficult to pin point data to support the monster discounts in cattle futures. Cattle do have a habit of coupling action and reaction (think 1973 Nixon price freeze/major top at new all-time highs 6 years later OR dairy buy-out/Chernobyl in the 1980s) Which has brought to mind in recent weeks, 2008, when monster premiums in live cattle futures existed for months, unsupported by fundamentals. Looking back, we know those premiums were never realized by the cash market. It was only demand for futures contracts by outside money that took cattle futures ridiculously high. At the time analysts attempted to explain the premiums, just as many are trying to explain the huge discounts now.
Could the opposite side of that huge rally and top in July of 2008 be expressing itself now in 2015? Is this simply the “reaction” to that “action”? It is interesting to contemplate that cash trading as low as today’s discounted futures prices is just as far-fetched as the sky high premiums of 2008. Hard to argue that there is a litany of bearish fundamental “expectations” reflected in sub-$140 summer fed cattle prices. We won’t know until then if futures overshot the mark on the downside like they did on the upside in 2008.
*MP Agrilytics of Collierville, TN is a proprietary provider of comprehensive livestock and meats data, analytics and research. http://mpagrilytics.com
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