It's a fast market
Market fundamentals are starting to look pretty good right now although a few things look a little out of line. The beef industry finally got the cutout over $2 on May 2 and it has remained there with the top coming in just before Labor Day at $211.67. The last time the Choice cutout was over $2 was in 2003 when it reached $2.03 and stayed there for at least two days. But retailers weren’t going to take much at that price.
The cutout is strong enough to support live cattle sales at $1.30, but cattle feeders must not feel that they have any leverage on the cash market with fed cattle trading at $1.25 last week. The pre-Memorial Day rally took live cattle prices up to $129 three weeks ago and then it vanished. Packers were also trying to fulfill Memorial Day orders that were sold at a discount to the current spot market.
The futures markets roll in price discovery is becoming a bit tenuous with the June contract languishing around the $1.20 zone and a cash price of $1.25. This is the largest positive cash basis we’ve seen since last October. We would expect the futures markets to move higher than the current cash price and get the market moving in the right direction. With the current inventory of live cattle and the fact that we’re in the middle of high demand season, this market should be much stronger than it is. With the cutout trading over $2 for the past month, one would think it would pull the futures markets higher.
There appears to be little interest in trading the futures markets at this point, except for guys who hedged cattle back in January when futures were at their highs. Open interest on live cattle contracts is about as low as it gets, staying at around 300,000 contracts. The large hedge and managed money funds have pretty much left the building.
Andy Gottschalk at HedgersEdge.com said in his outlook report that, “Beef demand was down three percent for the first quarter of the year. Second quarter demand, however, is showing signs of improvement, which should be expected on a seasonal basis. The May-June period is normally the best demand period of the year. How well consumers respond to upcoming retail beef features will likely determine the degree of seasonal decline in fed cattle prices this summer.”
Also, the consumer confidence index reached its highest point over the past five years which means that consumers are confident about the present and near term future of their finances and spending more disposable income. A new Gallup Poll also found increased optimism. Gallup said last week that U.S. consumers are the most upbeat since Gallup began tracking U.S. economic confidence daily in 2008.
Gottschalk goes on to say that, “Fed cattle prices basis in the south plains stalled since the last cattle-on-feed-report at a previously identified resistance area of $128 -$120. Cash price support is at $122. The good news is that cutout values during the same period scored new highs, exceeding our objective of $206. The latter advance is the result of improved retail beef margins versus last year, allowing retailers to bid more aggressively of beef product. Higher retail beef margins entering the May-June period have also set the stage for increased beef features, which should again lead to improved beef sales.
“The current higher retail beef price will support higher fed cattle price and beef cutout level than last year. This is being fully realized at wholesale, with the beef cutout at record levels. Fed cattle, although off their peak price, are trading $5.00 cwt. above this same week last year. Year to date, the all fresh beef series has averaged $4.90, which would support fed cattle at the $128.00 level. A year ago retail beef prices could only support cash prices at $122.”
Gottschalk has adjusted his annual average price estimate for fed cattle down to $126 and has a trading range of $116 - $131. And the most likely timing for a seasonal low is late July through mid-August, which is fairly typical.
If we have a good corn crop, it is expected that cattle feeders will start to return to profitability in late summer or early fall. It will also be interesting to see how the big summer video feeder cattle sales will go. Typically, they produce the highest prices of the year for feeder cattle, but feeders will need to see some black ink first. — PETE CROW