A Mix of Bearish and Bullish News

– Stephen R. Koontz, Professor, Agricultural Economics, Colorado State University

Summer is upon us and all my thinking and talk of potentially strengthening spring cattle markets appears for naught.  For most of the rest of the year, the market will face the seasonal increases in supplies and it will take much more than greening of grass to improve prices.  There will have to be significant better news.

What do the market fundamentals say?  The details are a bit of a mixed bag.  The Choice-Select spread rallied sharply higher last week to $16/cwt.  This premium/discount is as large as it has been in the last two years.  And that rally could bode well for June.  Further, the prior week showed some sharp increases in primal prices.  Loins, ribeyes, tenderloins, and rounds all were higher based on last week’s news.  Chucks were flat and hamburger components continue to be so soft compared to some other major carcass components.  Steer slaughter and total cattle slaughter continue to run strong.  Steer slaughter is ahead of five year averages and total cattle slaughter is ahead of last year.  Clearly, this is not a repeat of a year ago when feedlot marketing’s were being delayed.

The most recent Cattle on Feed report communicated that cattle on feed more than 120 days continued the downward direction started in April.  The inventories of these longer fed cattle remain below last year and below the five year average.  From May through October of 2015 was where these inventories built significantly and weighed heavily on fed cattle prices.  These inventories are worth watching closely over the summer into the fall.  Live animal weights for slaughter cattle have also not yet started the seasonal increase and are only slightly above a year ago.  Weights increased sharply last year and added to the market ready inventory problem.  How cattle are being marketed by feedlots will need to be watched closely over the next two months.

Retail beef margins have been very strong all year.  Retailers have made very good money on beef this year and packer margins were extraordinary in April.  Yes, that is old news, but prices in May have not changed this margin much.  International trade of beef remains reasonable.  In contrast to last year, the value of the U.S. dollar in no longer dramatically strengthening , in fact is has declined.  So, beef trade flows are showing some improvements from a U.S. perspective.

What does the technical say?  Live cattle futures, specifically the June contract, pressured support that was established back in December of last year.  The market traded lower than $115 in late April but was not able to solidly close at lower prices.  That was a buy signal.  The June contract rallied in early May, stopped short of $125, and then weakened.  The market traded strong through last week but only within the day – starting low and closing at higher prices.  August feeder cattle have a similar pattern but were able to break support in April and move lower.  Subsequent rallies have been softer.  The current corn market will not let feeder cattle strengthen – without substantial improvements in live cattle.  It has been a while since soybeans were the dog and corn was the tail but that appears to be the case to me.  Wet weather in South America created harvest concerns and a $2.00 rally in beans that corn could not ignore during planting.  Crop Progress suggests both crops are largely in and up so we’ll see how the market digests further news.  The USDA WASDE has not backed South American production estimates.  But this feed market can only drive the feeder cattle market.

Unfortunately, the things to watch for are the same things as I wrote about over a month ago.  Live cattle contract prices currently sit just above support planes.  Beef featuring is needed at retail and aggressive marketings to clean up the showlists.  And then their remains the lingering concern about the economy and its impact on demand.