Heavy Supplies of Beef and Pork Weigh on Cattle Prices
The market’s perception of demand was partially damaged this week.
Monday’s Comprehensive Boxed Beef report showed end users had been a little weak on extended delivery procurement in four of the past five weeks.
Boxed beef started the week strong, but may only end mixed. Choice is -0.44 and select is +2.14 through the Friday morning report. Cash cattle was hit for $3. This week’s cash cattle trade will average around $117.50. That would be $6 off the peak week of the fall season from six weeks ago (this week’s average vs. that week’s average).
The structure of the futures pricing has changed a little, as well. The market is pricing in a drop to $114 later this month using the current December futures contract and a normal basis for this time.
The February contract is pricing in a $118 cash cattle price. April, with its normal positive basis, implies $120. We have no problem with the lower trade assumption for the month of December. We are dealing with a very heavy seasonal supply of both beef and pork.
On the supply end, USDA guessed this week’s kill at 633,000 head. That is under our morning 641,000 estimate. For all of this fall we have seen slaughter restrained to peaks of 645,000 to 648,000. On the low end, excluding the holiday weeks, 623,000 to 633,000 has been the word. This week’s kill would be 4.0% over last year. That fits in with the past six weeks that ran 3.7% over last year.
But slaughter is not beef production. When including the weight situation, this week’s beef production of 526 million pounds is 3.4% over last year. We would suspect when USDA revises this estimate it will drop down to only a 3%-over-last-year number.
The bearish Head and Shoulders top formation on the January feeders still implies down to 136.45. This fits in with normal feeder cattle seasonals. As a reminder, feeder cattle have a different seasonal than live cattle. Live cattle seasonals show the February typically breaks hard from November 26 until December 10.
On the June, this runs from November 27 until December 9. This break into the second week of December is typically the lowest price traded on those 2018 contracts all the way through their various expirations.
Though we don’t like trading seasonals blindly, we can’t ignore that this renewed bear focus for cattle does fit with the “norm” for this time.
There are also a lot of hopeful bulls that still haven’t given up. Additionally, though we do have a short-term change in the market’s perception of demand, we can’t ignore the strong slate of positive economic news over the past three weeks. Today’s nonfarm payrolls are an example. In our opinion, Q1 futures are undervalued. We will take action later this month when the market is ready for it.
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