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Missed Opportunity

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May 12, 2017

Pete Crow

Cash fed cattle found their spring top two weeks ago as the market touched $148. Since that point, the futures markets have been in an absolute free fall with the May contract losing around $13 to end up at $121.62. Cash fed cattle trade was lower last week to $138-140, but still holding onto the large cash premiums.

The only thing that changed in the market was that the futures market unraveled when the longs left. We love to see them come, but always hate to see them go. Cattle feeders will remain aggressive sellers of fed cattle and continue to pull cattle forward for as long as possible.

The big disappointment was in the feeder cattle futures. August feeders reached a contract high of $162 during the big rally and presented summer grazing programs an excellent opportunity to cover their risk with a put option, but that market is already $15 lower than a week ago. The CME feeder cattle index was at $148.08 last week and that’s about where the contract currently sits, close to converging.

The only thing in the market that moved higher was the boxed beef cutout; Choice was at $244.58 last Wednesday, closing in on a new top. Beef packers are running wide open to fill Memorial Day orders. They were losing $6.10 a head on an average buy of $144.45. After several days of losing money, packers were able to reduce slaughter and get the cutout high enough to get some positive margin back.

The boys at Hedgers Edge said last week, “There are few certainties in life, but one certainty is the advance in beef cutout values has currently wiped out retail beef margins. In response, retailers will raise prices—in some cases, already beginning this week. Pork will likely be the beneficiary of last week’s sharp advances in cash cattle prices and in beef cutout values. Demand factors remain positive, with employment and income continuing to post gains. It is the lack of retail beef margins, resulting in raising retail prices and reduced features, which will slow sales.”

Demand for beef for most cuts is dramatic. The 50 percent trim market has been on fire recently. The 50s were trading at $32.25 a year ago and are currently trading at $174.79. Cow slaughter has also been rising and so far this year we have averaged 6,000 more head every week. Total cow slaughter is 90,000 head greater than a year ago. Jim Robb at the Livestock Marketing Information Center said that if we can keep these cow slaughter levels at this pace it will start to neutralize all the replacement heifers that have been added to the national cow herd by the first of the year, 2018.

Still, cattle feeders need to keep the pipeline full, watch those carcass weights and sell cattle aggressively to minimize the typical summer seasonal low.

The cash premium to live cattle futures will continue to motivate feeders. The talk among market watchers is when and how low can it go? I’ve been hearing somewhere between $118 and $124. This would be 15 percent off of a $147 high, a fairly standard pull back.

Troy Vetterkind of the Vetterkind Brokerage said, “The cash feeder cattle market is beginning the week higher but not as high as last week. As expected the feeder cattle trade has calmed down a bit since last week with most auctions reporting cattle selling $1-4 higher as opposed to last week’s strong gains of $5-10. Obviously current fed cattle closeouts are making very good money even on hedged cattle so demand to replace those animals remains strong. This is going to keep some solid support under the cash feeder cattle market going forward as available supplies of cattle coming to auction will begin to tighten up seasonally as we get into early summer.”

It will be interesting to see how generous cattle feeders will be on buying replacement cattle over the next few weeks. The big video auction companies will start their special summer sales soon and hopefully start pricing calves for fall delivery. In most years the early sellers of fall-delivered calves and yearlings get the best prices. So watch them closely, pay attention. Windows of opportunity open and close quickly in this extremely volatile market. — PETE CROW

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