Cash cattle, futures surprise
— Both markets see unexpected gains
Last week gave the whole cattle market a bit of a shock. Usual market watchers, confident the cattle market was tucked in for a dog-days-of-summer nap, turned their attentions to monthly reports. So it was a surprise for everyone involved when both cash cattle and futures made tidy little gains.
Contrary to early-week predictions of a “steady at best” week for cash fed cattle trade, the Fed Cattle Exchange saw almost 80 percent of its offering sell at from $117-118.75. This was above the prior week’s $116.50-119 (average $117.52) live prices.
Fed Cattle Exchange cattle for immediate delivery (one to nine days) averaged $117.80. Cattle for delivery out a couple weeks (one to 17 days) averaged $118.45. Only cattle sold for delivery17-30 days out saw a lower price than the prior week, averaging $117.34.
Commenting on the surprising market activity, both in cash and in futures, Cassie Fish of the Beef Report commented, “Apparently buying less than 100,000 head negotiated for four weeks in a row had reduced packer inventories of cattle and the need to replenish this week was urgent.”
At close of trade last Thursday, over 57,000 head had been confirmed sold on the negotiated cash market. Live prices ranged from $118-120 (average $119.35) and dressed prices ranged from $188- 190 ($189.25 average). These prices represent a recovery of the earlier key support price of $119 for live cattle, according to Andrew Gottschalk of Hedgers Edge.
Live cattle futures too made surprising gains. After having taken a plunge the week before, last week saw near-term contracts gain a net $3-4. The August contract settled last Thursday at $117.42 while the October contract settled at $117.82.
Compared to the prices for future delivery set in the Fed Cattle Exchange, the August contract is admirably close to converging with cash prices with cash carrying only a slight premium over the futures contract. That sort of relationship has been rare in recent markets.
Troy Vetterkind of Vetterkind Cattle Brokerage maintained some earlier pessimism however, saying: “Aside from readjusting the basis that could go from positive to negative, I don’t feel we’ve hit a seasonal low in the cash fat cattle or boxed beef market and feel the futures aren’t going to be able to hold a lasting rally until we get past some of these numbers of marketready cattle in September/ October.”
He estimated that $117 and $116 represented resistance points in August and October live futures contracts respectively. He additionally predicted downside risk for August at $110 and for October at $105.
Fish had different ideas however.
“[The August live contract] is the least overbought and the only contract month still under the 40-day moving average, which happens to line up with the last swing high of $118.80. Traders may take a shot at selling the market here but [the August contract] could very well be poised to gain back ground on [the October and December contracts] once Goldman is over tomorrow,” she said Thursday afternoon, referring to the “Goldman Roll.”
This bit of financing slang refers to the fifth through ninth business day of the month proceeding a futures expiration month. During this time, the Goldman Sachs Commodity Index is rolled forward into the next futures expiration month. All of last week represented the “Goldman Roll” for the August live cattle contract.
Fish also noted that the much-anticipated summer low is likely still to come.
“Technically, the charts for the entire cattle complex look impressive with the probabilities of a summer low growing. Only the perceived wall of cattle in the coming weeks seems to stand in the way of the possibility that $112.40 was the summer spot low. Plenty of analysts are still predicting a $110 Q3 cash low, based on supply projections.”
In a reversal of recent trends, the beef market declined as the cattle market headed upwards.
The Choice beef cutout lost a net $9 over the course of last week, closing Thursday trade with $209.85. The Select cutout lost $5.25 to close at $197.26.
“Cutout values are expected to continue to trend lower seasonally with the target for a July low at $210- $212. This price level will renew retail buying interest as their margins are being restored,” noted Gottschalk early in the week. He expected the next level of Choice support stands at $200-204.
With the rapid decline in cutout value, Gottschalk pointed out that retail margins have been restored, which could lead to more aggressive featuring of beef items going forward. This bodes well on the consumer demand side as well.
“Total beef demand continues to be a positive surprise. Employment and income gains are expected to continue to bolster domestic consumer demand for beef.”
Given that last week saw a flurry of USDA reports released, and the biannual Cattle report—often generically called the “cattle inventory report”—will be released this week, there was considerable focus on currentness and the future of the supply side of the cattle and beef market.
“It is worth noting that placements month-to-date are up approximately 8 percent,” Gottschalk commented. “The aggressive placement level [year-todate] has more than absorbed the increase in feeders and calves outside feedyards on Jan. 1. The continued large placement level raises the possibility that the USDA may have understated total cattle inventories.”
Fish also weighed in last Thursday afternoon.
“Fresh actual slaughter data today illuminates clearly the aggressive fed cattle slaughter in June. For the week ended July 1, fed cattle slaughter totaled 513,804 head, making June’s fed kill—512k, 515k, 516k and 514k—the largest since June 2013 and likely larger than most analysts had predicted. It could be argued the industry slightly overkilled in June, the sixth month in a row in 2017. Steer weights for that same week were down 9 pounds [year-over-year]. The industry has lost no currentness and it is reasonable to consider it actually gained a bit. Perhaps that’s as good as explanation as any as to why the market continues to be resilient, even in July.”
The feeder cattle auctions came back with a vengeance last week with almost every one of the surveyed auctions reporting gains in prices and offering volumes. Medium and large 1-class (#1) cattle in the 700-800-lb. weight range traded mostly in the upper $140s to lower $160s, though outliers existed on both ends.
California: Trade volumes were still quite good after the Independence Day holiday at the Cattlemen’s Livestock Market in Galt last week, but prices were steady to lower in some cases. The range on 31 7-weight steers shifted downwards to $120-136.
Kansas: The Winter Livestock Feeder Cattle Auction of Dodge City sold 1,330 head last week. Compared to the prior sale at the end of June, feeders were said to have a firm to higher undertone with active trade and good demand. Sixtyeight head of #1, 758-lb. yearling steers averaged $156.85.
Montana: The Public Auction Yards of Billings was steady with its volume at 759 head. There were too few feeders sold last week to get proper comparisons, but feeder buyers were said to have been moderately active. Only two benchmark steers sold for an average of $140.50.
Nebraska: Sales receipts were up considerably at the Bassett Livestock Auction Market compared to the pre-July 4 sale. Despite the large volume of sales—8,045 head—there was a limited number of comparable sales on yearling feeders. Feeder steer calves were steady with the prior sale, with the exception of light 6-weights which saw discounts of $6- 10. A pair of large packages of benchmark yearling steers sold impressively well. The group of 166 steers averaging 728 lbs. brought an average of $174.32, and the 251-head, 784-lb. steers averaged $167.99.
New Mexico: The volumes more than doubled at the Clovis Livestock Auction last week compared to the prior sale. Feeders were called steady to up $2 with the exception of 5-weight steer calves, which were up $8-10. Trade was called active on very good demand following two weeks of no sales. Several groups of benchmark cattle sold with yearlings outperforming calves. Benchmark yearling steers ranged from $140.50- 153.50 while the calf offerings ranged from $123.50- 135.
Oklahoma: Over a twoday sale last week at the OKC West-El Reno auction, over 8,860 head of feeder cattle sold. Compared to the pre-July 4 sale, feeders were up $3-4 higher for yearlings, while calves were called steady to up $5. Demand was called good, especially for long-weaned calves. Several large groups of #1, 7-weight yearling feeder steers sold between $152- 161.50. A group of 32 head of #1, 732-lb. steer calves averaged $148.55.
South Dakota: The offering was more than doubled last week at the Hub City Livestock Auction compared to the prior sale. The offering before the July 4 holiday was too light to make an accurate trend statement, but higher undertones were noted. Cattle coming off grass were in high demand. Two groups of benchmark yearling steers sold, with the light group (733 lbs.) averaging $165.44, and the heavy group (778 lbs.) averaging $149.50.
Texas: Volumes were low but steady at the Amarillo Livestock Auction last week. Compared to the most recent sale, feeders were said to have sold steady to weak on limited comparable sales. There were no #1, 7-weight steers sold, but a 6-weight calf sold for $143.50, while a set of five 8-weight yearling steers averaged $132.50.
Like live cattle futures, near-term feeder futures made surprising gains. The August feeder contract gained a net $8 over the course of the week to settle Thursday at $153.02. The September contract gained almost that with a close of $152.97. — Kerry Halladay, WLJ editor