Last week’s $8.00-per-cwt jump in cash fed cattle prices at first glance appears to have brought in many feeder cattle buyers from the sidelines. But all is not as it seems.
Futures prices are rising, sometimes sharply, to new highs after a hiatus in late June and early July that took the nearby Aug contract down 5.46% to a swing low of $207.90 per cwt. The contract Tuesday settled at $221.42, up $1.25 and continues to move higher in overnight trading.
It seems the Aug contract is rising on declining open interest, something that has been going on since early June in a slow, orderly liquidation.
When open interest declines while prices are rising, it means the price gains are mostly because of short covering and not from demand for new long positions. Such markets usually lack the foundation for an extended rally, and yet the current rally continues as a sort of self-fulfilling prophecy – futures prices are up, augmenting the implications of short cash supplies and forcing what little demand is left to pay up, which fuels further futures price gains.
Open interest in Aug is declining because speculators, by rule, must liquidate a large portion of their holdings as the contract nears expiration. And since the funds are net long, open interest declines as they roll positions forward. Open interest in the Sep contract, for example, has been rising along with prices, the early July dip notwithstanding. Prices now are at record highs.
And declining open interest in Aug doesn’t mean prices can’t continue to rise. The expiring contract still can glean strength from the next contracts as traders keep their spreads in line.
Plus, the CME Feeder Cattle Index continues to set new record highs, which will tend to pull on the Aug contract as expiration nears. The Index for the seven days ended Monday was $224.19, up $2.24. This remains above Tuesday’s Aug futures settlement of $221.42, up $1.25.
Live cattle futures also are lending strength to the feeder cattle market. The Aug futures contract continues to set new highs nearly every week, even though open interest in this position is declining as well for the same reason.
Monday’s live cattle market set a new contract high of $160.20 per cwt, although prices retreated somewhat Tuesday and remain above the four-day moving average.
BOXED BEEF STILL ADDING STRENGTH
Behind the strength in fed and feeder cattle markets is the continued strength in beef and by-product prices and what are thought to be positive packer margins.
The USDA reported its choice cutout value Tuesday at $261.34 per cwt, a new record high and a gain of $2.04 on the day and the fourth straight daily increase. The value has risen $8.54, or 3.38%, in the last five trading days from $252.80 to the new record.
The USDA’s select cutout was reported at $259.03 for a daily gain of $2.86. It continues to trend higher as well, with a gain of $13.24, or 5.39%, from a week earlier.
The USDA said Tuesday’s gains were based on good demand and moderate offerings. Ribs and round cuts were higher, while chucks and loins were only steady to firm. Trimmings were steady on light-to-moderate demand and offerings.
Slaughter through Tuesday was estimated at 223,000 head, down 6,000, or 2.69%, from last week. Slaughter also was down 19,000, or 7.85% from the 242,000 reported at the same point in the week a year ago.
And, since slaughter weights are in line with a year ago, that means beef production is headed for a weekly decline, which could support product prices and, thus, cattle prices.