Futures markets appear to have been in a death spiral the past few weeks and trying to drag cash markets down with them. It’s clear that futures traders think cattle prices will be headed lower into the summer doldrums. The Cattle on Feed report due out last Friday is expected to show us that we have about 8 percent more cattle on feed compared to a year earlier.
In other words, they are predicting that the sky will fall and drag cattle prices to the lowest levels we’ve seen in years. I suppose there is justification to be bearish on the beef and cattle markets. Analysts have been pointing to a buildup of fed cattle for months. Many suggest that we are just a few weeks away from hitting that wall.
We always look at history to judge these cattle markets and there is no question we have more cattle to market than we did the year before or for the past five years. Carcass weights are getting bigger and have surpassed year-ago levels. Without question, there is more beef on the market, but we have also never seen better demand for beef.
Demand is the hardest thing to measure but, barring some major trade dispute or animal health issue, there is no reason to question the continued demand trend for beef. We are selling more beef for more money than ever before.
The naysayers trading the futures contracts are showing their extreme pessimism toward the live cattle contracts. The deferred contracts are the lowest they have ever been over the life of the contracts. April live cattle was trading at $118 on March 22 while the June contract was $108, even though the current cash premium is at $8-10.
This doesn’t offer cattle feeders much protection or incentive to place cattle. Feeder cattle placed today, at reasonable benchmark weights, will be due in August. At this point I would think cattle feeders are avoiding August marketings like the plague. And that will keep driving feeder cattle down further. The CME feeder index was $141.25.
Walt Hackney, an analyst for DTN, said recently, “A large cross-section of cattle feeders are extra sensitive to the trend of live cattle futures and the chances of the CME providing the basis for a profitable forward contract program for the second, possibly into the third quarter of 2018. Packer basis is also profitable for the cattle feeders.
“The lack of predictability of the CME in respect to the fundamentals of the fed cattle inventory and the fund-trader manipulation of the live cattle futures has historically created enough volatility in the trend of the LC futures that any effective trading by the less-than-large cattle feeder has been an extreme challenge.
“Analysts have been fairly successful in seeding the general cattle feeder sector with pessimism in respect to the prospects that the feedlot can or will materialize for the cash trade.
“The crux of this pessimistic outpouring from some of the market watchers may have some degree of creditability, due to recent indicators coming from recent feedlot placement numbers from the Cattle on Feed reports.”
Feeders on the other hand are relatively comfortable. They have seen the live cattle cash market expand the past several weeks with live fed cash prices toping at $130 last week. And hedged cattle feeders are aggressive sellers this week at $126. Northern Plains feeders are finding stronger markets while southern feeders are struggling with larger show lists. They need to sell more cattle, but the cash premium to futures should keep cattle moving.
Cassie Fish at Consolidated Beef Producers said that “A fed auction in eastern Iowa sold cattle for $135.25, last week, to a major packer and several other lots sold for over $130. An annoying reminder of how disconnected the futures and cash markets are.”
Will beef demand carry us through the next few months of larger supplies? I think it will. Beef exports have been great and have exceeded everyone’s expectations. I spoke with Dan Halstrom at the U.S. Meat Export Federation to see if there are any issues on the horizon that would disrupt this export demand. Barring any dramatic trade disputes over NAFTA or retaliation over the steel tariffs, his answer was no, and he sees the export markets growing at 4-6 percent a year.
January beef exports were up 9 percent over last year in volume and 21 percent higher in value. The trend line for additional growth is clear, is very positive, and should support this additional beef production.
The market isn’t static. We will see some decline in prices, but I bet the futures traders have oversold the market. — PETE CROW
