Market corner: Did live cattle futures bottom?

2014-08-18T14:15:00Z Market corner: Did live cattle futures bottom? Agri-View
August 18, 2014 2:15 pm

My parting words in last week’s column were, and I quote: “my best guess is that live cattle futures will have put in a bottom by the time you pick up this.”

While not overly conclusive yet, it appears highly likely that most active October live cattle futures scored a bottom on Aug. 13 at just under $145.

Friday’s closing price, on Aug. 15, was $147.75, or nearly 300 points off the Wednesday low.

The trading action was very volatile with stability coming from trade in the cash steer market that occurred late in the Wednesday session.

Producers in Nebraska were the first to sell cattle with packers paying $1.55 per pound to own cattle. We soon learned that very late on Wednesday a similar price was paid for some cattle in Kansas and the following day, Nebraska experienced addition cash trade at $1.56.

Finally, on Friday, the producers in Texas sold their cattle at $1.55 and later we learned a few more head were sold in western Nebraska and Colorado at $1.57.

While these prices are down substantially from recent all-time high prices, the trade earlier in the week in tandem with a firming tone to the bids lent stability to the futures market.

Explaining the huge break that occurred in live cattle futures is not an easy task. I consider the top, however, quite meaningful, and it needs to be respected. The recovery in futures prices that follows will be critically important to monitor.

This top in the futures market should be considered a warning sign, and trouble in the cattle market lies ahead. For one, the premium to cash futures market appears to have vanished. Two, retail beef prices have been record high for months. Three, because feeder cattle prices have been driven to all-time highs, fed close out break evens are rising. If cash steer prices have peaked, we are looking at a very dangerous situation in the months ahead.

Finally, we have clearly entered into an expansionary phase in cattle numbers. Despite the fact that it will be at least 2 years before meaningful increases in production become apparent, the market place nevertheless is aware of the trend.

It also would appear highly likely that the tight grain situation is in the past. Two consecutive record large corn crops in the U.S. have replenished corn supplies both in the U.S. as well as globally.

The industry most capable of capitalizing on this situation, declining beef production, tight pork production and declining feed prices is the poultry industry.

We will talk more about this in future articles.

Returning our attention to the live cattle futures market; the seasonal tendencies would suggest that futures can now work higher into the middle to end of the September time frame.

At this time, one can measure the size of the recovery, take a look at where cash has gone, and then make decisions in regards to hedging future expected production. Make no mistake, using live cattle futures and options, down the road, will be critically important to assure profits in feeding cattle in the months ahead.

Information contained herein is based on what is believed to be the most reliable resources available at the time of publication. Trading commodity futures or options involves risk, and past performance does not indicate future results.

Dennis Smith has been a commodity broker for 26 years and works extensively with livestock and grain producers. Smith publishes a highly respected and widely followed “daily livestock wire,” which is part of his brokerage services. A free 30-day trial to the livestock wire can be requested by emailing him at dennis.smith@archerfinancials.com or calling 877-377-7905.

Copyright 2015 Agri-View. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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