Stephen Koontz, agricultural and resource economist at Colorado State University, is recommending producers who anticipate selling calves in the fall purchase some price protection in the form of options.
Koontz make his recommendation in this week’s In the Cattle Markets for the Livestock Marketing Information Center. In the article, he says the market is giving producers a second chance at hedging these calves. The current situation is not as good as it was in May, but the technical picture remains the same.
The Oct feeder cattle contract put in a key reversal top on May 4, he said. A key reversal is an outside trading day with a high above the previous day’s high and a low below the previous day’s low, with a close near the low of the day.
Key reversals are significant in that they communicate the day was finished at a significantly different level than where it began or even where the bulk of the action took place. Many speculators will feel betrayed by the market’s action and exit their positions quickly, exacerbating the move over the next few days.
Technical patterns for the live cattle futures market are similar, even though the details are different, Koontz said. Highs established in early May were pressured in late May and early June, and chart resistance has held, generating more sell signals.
FUNDAMENTALS ALSO WEAK
Koontz said his main concern for the summer and early fall is that feedlot placements over the previous five months have been at or above the same months a year earlier.
“We have not seen larger volumes at heavier weights yet, but they are inevitable,” he said. “When this occurs, there will be price weakness for fed animals and feeders.”
The expected price weakness has not occurred because packer margins are very strong, he said. (Actual packer margins cannot be known, but market analysts and economists will make educated guesses based on futures and cash prices.)
Boxed beef composite values have rallied to more than $250 per cwt, a level not seen in all of last year, and the choice/select spread is above $30, also something not seen in all of 2016, Koontz pointed out.
And the calculated number of cattle on feed longer than 120 days and more than 90 days is the smallest he can recall seeing relative to the number of cattle on feed.
Strong beef movement (presumably demand) and fed cattle marketings in combination with tight market-ready inventories is the market’s theme this spring.
In the end, the short-term fundamentals are much stronger than the long term, Koontz said. Such market conditions have a propensity to change sometime between June and October.
Reasonable basis estimates suggest a talk with a broker would be a wise move, he said.
CASH CATTLE QUIET
Fed cattle sold on the livestock exchange video auction Wednesday at $123.00 per cwt for one- to nine-day delivery, down from $138.82 on June 8, the last time trading was reported on the exchange.
Cash cattle traded Wednesday at $122 to $123 per cwt on a live basis, down $10 from $132 to $133 last week.
The USDA’s choice cutout Wednesday was down $1.57 per cwt at $245.42, while select was off $0.98 at $218.90. The choice/select spread narrowed to $26.52 from $27.11 with 110 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Tuesday was $148.07 per cwt, down $0.17. This compares with Wednesday’s Aug settlement at $144.65, up $0.72.