The Jan feeder cattle contract expired Thursday at $212.40 per cwt, $1.50 below the CME Feeder Cattle Index by which it is settled.
Futures and cash markets don’t have to converge exactly, but since the contract is cash settled, traders holding short positions will have to pay those holding long positions the difference based on the Index. The payments are to reduce the local hedge risk taken on by cattle producers.
As of Thursday’s contract expiration, there were 4,432 open Jan contracts to be settled.
But this isn’t the only time in which the contract expired with a a notable gap between the Index and the spot contract. The Nov14 contract expired at $236.35 per cwt, yet the Index was at $240.11.
Nor is it particularly unusual for the Index and the spot contract to diverge. A graph of daily spot contract settlements compared with the CME Index going back to mid-July.It’s evident that late in the fall and early winter, feeder cattle futures were leading a tight cash market lower. The number of cattle on feed began to register larger totals than a year earlier, making futures traders think demand for replacement calves would decline.
However, tight supplies of actual feeder cattle kept supporting the CME Cash Index. Cash prices succumbed during January to the pressure of a weaker futures market.
What’s more, the Mar feeder cattle contract, which becomes the spot month Friday, settled $0.77 per cwt lower Thursday at $203.58, so market pressure on cash feeders seems likely to continue.
VOLATILITY LIKELY TO CONTINUE
But cash markets remain tight, and trade sources say market volatility can be expected throughout the year. Tightly supplied markets will almost always be more volatile than the same markets when they are well supplied, they say.
But with the Mar contract taking over the lead position on Thursday, some of the day’s losses were trimmed after Jan expired. This buying interest could carry over into Friday, particularly if it was short profit taking as several analysts thought.
The current discount in Mar relative to the index may help underpin the market and add to the buying interest going into the weekend. Technical traders also said the Mar contract ended Thursday with a bullish bias.
BEEF MARKETS DROPPING
Wholesale beef markets continue to drop. The USDA reported its choice boxed beef cutout value Thursday at $244.59 per cwt, down $2.70 from Wednesday and down $11.06 from $255.65 a week earlier. The select boxed beef cutout Thursday was down $2.00 on the day to $238.34 and down $10.55 from $248.89 a week earlier.
Sales into the spot market were fairly active with 125 loads of fabricated product sold.
The lower beef prices are likely to put a crimp in packer margins since the market for fed cattle this week held steady at $159 to $160 per cwt on a live basis.
Cash trading this week, however, has been rather limited, and trade sources say feedlots have more cattle to sell. More cash action is expected Friday, but with the tug-of-war over price continuing, volumes may be light again.