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Cattle Market Is Majorly Undervalued, According to Analyst
This week was a big one with a large 7.72 decline for June live cattle futures and 9.52 break for August feeder cattle. It would be safe to say that this was a surprise. At today's settlement price, the August live cattle futures are implying cash cattle will fall to $111 by the end of August when a normal basis for that time is applied. From the year's cash cattle high of $139.09 that came from mid-March, that would represent a 20.3% decline! That is far more than the 11.5% 15-year average decline from spring highs to summer lows. In fact, it would be even lower than all of the other years. The previous worst was -18.7% posted in 2006. Are futures anywhere near realistic with this incredibly bearish viewpoint?
Cash cattle traded lightly at $128 yesterday and more heavily at $127 in all areas today. That is a sharp decline from last week's $134. It was quite surprising to see USDA's weekly kill estimates this afternoon. They suggested 112,000 and 31,000 head for today's and tomorrow's run and a total week run of 587,000. This was quite a push over our 566,000 number discussed this morning. USDA's number would be a full 39,000 head over last week and would confirm that the seasonal jump in numbers is happening at a much bigger rate than anyone thought. This would be the biggest kill week since September of 2014! In addition, it would be 7.1% over last year. The previous four weeks had an average kill that was only 2.6% over.
To be clear, Allendale is quite skeptical of this one specific kill week representing the start of a new trend. Don't forget, we were expecting the year's high kill to be around 575,000 and not until the end of May. For those looking for some fundamental justification for this number, don't even bother looking. Placements from August through July through November, the period of time which determines April kills, all ranged from -3.5% to -10.7% year/year. How you get a +7.1% out of that beats us. On the other hand, are we going to get a big jump of unexpected cattle this summer? That would justify these ridiculously low futures.
Friday afternoon's Cattle on Feed report was moderately bullish. Only 4.6% more cattle were placed in March vs. one year ago. That was under the trade guess of +6.4% (ALDL +6.6%). Fewer cattle finishing in the August through October time frame is supportive. Marketings of finished cattle was supportive at 7.1% more than last year. That beat the trade expectation of +6.1% (ALDL +6.2%). Most of this increase was tied to the extra weekday in March this year, which accounted for a 3.8% increase. These numbers helped lower the On Feed population from +0.8% on March 1 to now +0.5% on April 1.
Also supportive was Friday's Cold Storage report. At 466.988 million pounds, it was a bit under the trade guess of 491.4 (ALDL 487.125). This represented a 24 million-pound decline from last month. That was the best March drawdown in nine years. This now makes it two months in a row of supportive numbers.
Wrapping up the week, we are a little hesitant on this market. Based on our supply-and-demand estimates, we have to suggest this market is majorly undervalued. Futures are implying there is another $16 left on the downside from here for cash cattle. If we get a big surprise in summer kills, then that discount is warranted. What shakes our confidence here is the simple fact that we are coming off a loopy supply pattern from last year. At that time we had almost no cattle show up in the summer but this big surge in the fall. Those numbers did not follow the placement schedule very well. This market should have been a buy $10 ago, $5 ago, and even today. However, we have to advise to stand aside as there is no indication that futures have stopped their sharp break yet.
Rich Nelson Allendale Inc. 815-578-6161
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