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A market to behold

May 5, 2017

Pete Crow

Looks like everyone missed this market rally. We’ve found a dynamic that I don’t think we’ve ever seen before. That is the dynamic between futures markets and the cash market and the extremely large cash premium that we’re seeing. Demand is the hardest aspect of the market to get a handle on and that demand has been very good, so far.

The industry has moved 635,000 more cattle than the prior year. Beef production is up 4.6 percent over a year ago. Production is rising and prices are rising. Most of us thought the winter high was made several weeks ago but we were wrong. With live cattle selling for $145-147 last week, some analysts are thinking we could top $150 this week.

Cattle feeders have done a remarkable job selling cattle aggressively and keeping carcass weights down, 25-30 pounds lighter than last year. Packers have had to slaughter a lot more cattle to get the same tonnage in beef to sell.

According to Andy Gottschalk of Hedgers Edge, “Each 8-pound reduction in average carcass weights reduces weekly production by approximately 1 percent. This is the equivalent of reducing weekly slaughter by approximately 5,900 head. Carcass weight data is currently very bullish. Provided aggressive marketings are maintained, front-end fed supplies project to remain 10 percent or more below the prior year into August.”

The futures markets have frustrated everyone selling cattle; they showed little market direction and for the most part were contrary to the fundamentals that quickly developed. The live cattle contract had a large wall of cattle priced into the market showing huge discounts to the negotiated cash market. Two weeks ago ending April 29, cattle feeders traded 148,794 head of negotiated cash cattle, a number we haven’t seen in quite some time. Packers were processing far fewer company-owned cattle than in the past.

The June live cattle contract is still $16 behind the cash sales for last week. We heard of a load of fed cattle selling at the Lanesboro auction market in Minnesota for $150 last week. Ironically, the Fed Cattle Exchange sold only four consignments at the $140 level.

Cash trade was expected to be somewhere around $145 last week. The deferred live cattle contracts all show a discount in subsequent months.

Just think about it: Fed cattle have advanced around $6 a week for the past three weeks and last week they were up $9 from the prior week. Cattle feeders improved their close outs $100 in just one week. It’s starting to feel like 2014 again.

The feeder cattle contracts are showing a stronger market than we’re currently seeing through the end of the year. August feeders closed at $160.10 last Wednesday. If you don’t mind me saying so, there is a nice hedge on your summer yearling program presenting itself, something we haven’t seen in a while.

The big question is: How long will this remarkable market last? The boys at Hedgers Edge expect the May 1 Cattle on Feed numbers to be 1.4 percent over a year ago, placements 8 percent higher and marketings to be 1.9 percent higher than a year ago. There was one less marketing day in May, which accounts for 4.5 percent. With all the cattle we’ve pulled forward, front-end ready-to-slaughter cattle should be quite low. The grading report shows that we’re still producing 71.2 percent Choice steers and heifers, 5.7 percent is grading Prime and only 18.7 percent of the slaughter mix is Select grade product, so cattle aren’t coming in without proper finish.

It seems the real threat to this market is in the retail side. Retailers have booked a lot of product for Memorial Day and packers are obligated to fill those orders. With the Choice cutout sitting at $233.14 last Thursday, retailers will have lost their margins and won’t have a lot of incentive to feature beef going into summer.

Export markets have also been quite strong with weekly beef exports 25.3 percent higher than a year ago, but if the cutout goes much higher it could be a show-stopper. Packers are already thinking about cutting production to keep the cutout high.

It’s a good time to start thinking about your marketing plans and risk management; we all know this rally won’t last forever. But if feeders keep marketing cattle aggressively it will defer the summer low in the market. Most analysts are looking to the fourth quarter as the challenge in the market. — PETE CROW

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