A negative carry in live cattle futures shows a lack of confidence in the market’s strength going forward.
Normally, a futures market will have a positive carry, meaning successive months trade at somewhat higher prices to cover just enough of the actual carrying cost of a commodity to keep it from coming to market all at once. Always a delicate balance, the carry also encourages some producer investment in future availability of a commodity.
In this case, the generally lower price for each successive delivery month is telling cattle feeders to sell sooner rather than later. Even the nearby delivery months are losing steam.
APR DROPS BELOW SUPPORT
The most-active Apr live cattle contract fell below chart support late last week, and Monday’s gap on daily bar charts shows even more selling interest. Large commodity funds were very long live cattle last week and likely needed to take some profits.
The contract fell below the 20-day moving average in its Monday drop and has not yet shown any inclination to go back and fill the gap.
Apr dropped below the 50-day line Wednesday but found technical support near the Dec. 1 high of $112.65 per cwt before settling near the day’s open and the middle of the day’s trading range. That left a “long-legged doji” on candlestick charts, which shows great uncertainty in the direction of prices in the short term.
For that reason, the chart is showing that a short-term rally is possible. Apr may go back and fill Monday’s gap, but the negative carry shows the longer-term trend is thought to be bearish.
SUPPLY SIDE ECONOMICS
The negative carry has some very fundamental reasons for being there. Three USDA reports within a week added numbers to what many had already suspected – the market is, or is becoming, oversupplied.
The USDA’s Cattle Inventory report Tuesday was perceived bearishly by live cattle futures traders, especially in light of the USDA’s Cattle on Feed report Friday and the Cold Storage report Jan. 24.
All three reports showed greater inventories that must be worked through, they said. And if foreign trade declines, it will only leave more cattle and beef for the domestic market to chew through.
All cattle and calves in the US as of Jan. 1 totaled 93.585 million head, 1.667 million, or 1.81%, more than the 91.918 million head on hand a year earlier, according to the USDA’s National Agricultural Statistics Service’s semi-annual Cattle Inventory report.
The total was about 600,000 head, or 0.65%, more than the average of analysts’ estimates by Reuters, which came in at 93.0 million.
The Cattle on Feed report showed 10.605 million head on feed compared with 10.575 million a year earlier. But placements were above expectations at 1.795 million versus 1.527 million a year earlier.
Frozen beef stocks were up 7% from the previous month and up 11% from last year.
CASH CATTLE TRADE QUIET
Average fed cattle exchange auction prices Wednesday were $3.13 per cwt lower at $118.84, versus $121.97 a week earlier.
Cash cattle then traded at $119.00 to $119.50, mostly $119, on a live basis, down $2.50 to $5.00. No dressed-basis trades were reported but sold last week at a steady $193 to $194 per cwt.
The USDA’s choice cutout Wednesday was up $0.88 per cwt at $193.75, while select was up $1.92 at $190.85. The choice/select spread narrowed to $2.90 from $3.94 with 111 loads of fabricated product sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Tuesday was $129.72 per cwt, down $0.57. This compares with Wednesday’s Mar settlement of $122.07, down $0.70.