Cattle Rally Is a 'Gift Horse,' According to Market Analyst
Bulls were clear winners for the week. Cash beef continued its rally with gains of 3.35 for choice and 3.92 for select. This now makes the beef rally five weeks in length. The normal low offering of market-ready cattle in February and March and a much stronger-than-expected interest from end users has hit this market with force. Cash cattle jumped by $3 this week assuming our $128.10 in-house estimate of the average price is correct ($125 - $133 range). Cash cattle had been stable in the previous three weeks. June futures, the dominant contract, ended 2.17 higher for the week after pushing to new highs for the uptrend.
The week’s kill totaled 585,000 head according to USDA’s 1 p.m. Friday estimate. That was just under our 589,000-head morning. Kills have ranged from 585,000 to 587,000 for three weeks now. That is above the 574,000 to 579,000 posted in the previous three-week period. This week’s run comes in at 6.3% over last year. We should stay around this 585,000 level until the second week of April. That is when numbers start building up into summer. This does not mean the market’s rally lasts into the second week of August, though. End users are generally procuring for three weeks ahead. For the period ahead, last year’s peak summer kill in June came to 608,000 head. This year it will run about 635,000 in June then higher into August. The average steer carcass is running 1.4% lower weight than last year (as of three weeks ago). This is 12 pounds. The average heifer carcass from three weeks ago was 1.6% under last year (-13 pounds). The week’s beef production, slaughter x weights, comes to 478.6 million pounds. That is 4.3% over last year. For the most part, supply is right where it should be.
On the charts, bulls are still running the show. Officially the trend is up and we just put in new highs for the uptrend. There is a gap still open from Thursday’s open that totals 22¢ wide. That will be used as a first downside target when the market is ready to discuss lower pricing. Lower trade is not in the expectation for early next week.
This week’s cash cattle trade averaged just over $128. Futures, with appropriate basis applied for each specific week, are implying a fall down to $121 cash by the end of April and $109 by the end of June. People unfamiliar with how cash trades at this time of year may argue that the April discount to cash is too large. Last year, we peaked cash cattle out in this exact week at $139. By the end of April, we were down to $124. We would argue it is not large enough.
We are bears for the general viewpoint that the normal February/March rebound is THE time to sell your summer finishing and beyond cattle. Most of the the trade's interest is in the “right now” cash cattle and beef action and not in the big picture. That may explain why we have not been as emotionally involved as many others right now (bullish or bearish). In our opinion, this rally is a gift horse for those who still need to hedge cattle for the remainder of the year. It is also a reminder of why we recommend nonmarginable hedge positions for cattle so heavily.
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