The market finally hit some speed bumps in April following some sharp gains in January, February and March. And with those gains, the setback could have proven to be the catalyst for a major setback in May. That’s especially true given that the June live cattle contract has been trading at a strong discount to the fed market. But all that wasn’t to be with the market being very durable during May.
As noted last month, “This market has proven persistently stubborn. While April didn’t provide any surprise to the upside, most significant was the market’s resilience – especially later in the month.
Fed prices are bound to work seasonally lower in the coming weeks and months as we head into summer. But if April is any indication of the broader undertone, it’s not going to happen without a fight.”
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Seemingly, there’s a strong tug-of-war occurring around fed cattle trade (at least for the time being). The fed market managed to hold trade together at mostly $144-$146 throughout the month of May (Figure 1). The four-week average is now $146, just $2-$3 back of the same measure at the end of April.
As noted earlier, basis has been especially strong in 2014 ($8-$10 through most of May versus just $4-$5 last year). That’s served as a strong inducement for cattle feeders to market cattle as aggressively as possible. Strong basis ultimately gets resolved by either the cash market softening or futures markets strengthening (or some combination of both).
Clearly, sellers wish against the first solution and hope for the second. CME trade of late has made some of that come true. The June contract has gained some on the fed market represented by the strong surge back to $139 on May 19 (that served as a $5 jump compared to just a month earlier). It’s since slipped back to $137-$138 but the overall strength is certainly positive for the market.
All that sets up some important discussion around the June-through-August time frame. My May column explained that fed trade, based on typical seasonal patterns, should break to the mid-$130s with some give or take depending on boxed-beef prices. However, given the relative strength of May’s trade and the current level of both the June and August contracts, summer lows may score a few dollars better than that. Of course, how that plays out depends on several critical factors.
• First, there’s the issue of early-2014 placements beginning to weigh on show lists. Slaughter rate has been somewhat slow during the month of May averaging only 588,000 head/week vs. 630,000+ head in 2013 (a 7% decline). All the while, cattle feeders placed an additional 382,000 head of cattle on feed during December through March and thus need to maintain a marketing rate 22,500 head/week faster than last year’s pace. Some of this year’s deficit comes from a slowdown in cow slaughter but the point remains, there’s work ahead.
• Second, the importance of slaughter pace brings back around the issue of overall demand (price and volume) and its influence on packer margins. It will be critical to monitor both wholesale prices (Figure 2) AND boxed beef volume (Figure 3) as an indicator of general demand in the coming months. That will have an ensuing impact on packer margins and their desire to manage kill schedules. Any major slowdowns will further confound that front-end supply.
All that said, beef’s pricing power has been nothing short of remarkable in recent years. But this summer could prove to be a critical test when it comes to retail beef prices as it relates to sales. Any indication of weakening consumer sentiment may cause some pushback, thereby pressuring wholesale prices and the packer’s appetite for cattle. Given the front-end of available cattle, the complex needs to keep beef moving at strong prices for cattle feeders to maintain the current leverage amidst weekly negotiations.
Nevertheless, cattle feeders are signaling optimism about the general state of the market going forward. That assumption is based on May’s record-setting feeder cattle market. The CME contracts gained $10-$11 during May and established a new all-time daily high as the month closed out. Both the October and November contacts seemingly poised to test the $200 mark (the equivalent of $1500/head for a 750-lb. steer).
Despite some seasonal softness, the market has glided along confidently and comfortably during the past month. That’s a favorable sign. However, as always, that doesn’t imply smooth sailing through the summer – to the contrary, there’s some tough digging ahead. And it’s always important to note, that at these levels (and considering the hazards discussed above), risk management is essential!
Those strategies look different for every operation. Nonetheless, the capital at risk at these levels simply can’t be ignored. And every month, it’s important to close with the reminder that producers are encouraged to remain fully informed, stay disciplined and be determinedly objective to ensure successful decision making going forward.
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