The downtrend in CME live cattle futures which started in December and has continued pretty much since, is as huge as it is unique. On a spot basis, it’s $23.60 off the all-time high. But with record discounts in the deferreds it seems even bigger.
The tight beef supply driver of 2014 will still be with us until late in the second quarter. So the blame has been laid on declining demand, both for beef and for cattle futures contracts. Boxed beef cutout prices have and continue to trade well above a year ago through this time frame, but exports have slowed and cheap competing meat supplies have grown. At the same time end users stockpiled trim in the freezer for some protection from what will be another year of small non-fed kill and our huge and growing dependence on imported beef to supply domestic ground beef demand, *up 53% YTD, YOY.
It’s fascinating and frightening that some of the bearish market factors to have surfaced over the last 3 months, when resolved, have had no positive effect on futures prices afterwards. Most recent case in point is the resolution of the West Coast port labor dispute late Friday.
Live cattle chart patterns now are overwhelmingly bearish and open interest has started a small build as short hedgers lock in losses and money managers following trends both seek and compete to sell any buy orders underneath the collapsing market.
Something, or perhaps more than one thing, seems to be casting a long and dark shadow over this market. The bears are content to point to total beef production, down 5.1% but boosted 1.7% by record carcass weights and record choice+prime grading as proof of uncurrent feedyards. But as everyone who trades cattle know, packers have and keep turning themselves inside out to make sure they don’t miss out on the very few large strings of fed cattle that trade (basis or otherwise) occasionally in Kansas and Nebraska. Most recently, the widely discussed +$7 over Apr LC trade speaks to both the need to secure inventory and the disbelief in futures trading par to cash, let alone premium. “Tops” trades have already been done this week at $1.50 over, though there will be little actual cash trade at most certainly lower money. Packer margins are improving quickly and could be even to positive by next week.
As things improve for the packer, maybe cash cattle prices can consolidate in the $150s in March. Interestingly, a year ago this week, the 5-area average was $150.61 and March 2014 saw prices between $149 and $152, begging the question, are the fundamentals really such a wreck that cash cattle prices are headed below year ago levels, as priced by April LC futures?
We won’t have this week’s comprehensive cutout until next Monday, but it was $239.30 last week compared to $218.12 a year ago this week. These numbers seems a clear illustration that the industry is in the midst of a huge transfer dollars from the cattle feeder to the packer.
*Thanks to MP Agrilytics, http://mpagrilytics.com, for providing insightful analysis that contributed to today’s blog.
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