Varilek’s Cattle Call: Hoping for profitability

The sell off in cattle futures continued last week in a more breath-taking fashion. Grains played a role in some of the frustration as cost of gains will be climbing above 1.10 per pound. Cash trade was sparse with some $118-$122 trade live at a couple dollars lower than week ago levels. The June contract traded the weakest with fund liquidation evident with the exit and rolling of positions.

One of the fears in the near-term is the feedyards wanting to unload cattle. If cost of gains fall below what you can get per pound on a finished animal, it will create a sense of urgency to get cattle out of the yard. A washout such as this always creates an opportunity on the back end, but we do not seem to be finding where that end is. The deferred live cattle futures joined in the break but not as severely. Those contracts will need to lead us higher if someone is going to purchase feeders with an uncertain corn price. If not, we could see further pressure on the feeder calf market.

The cattle on feed report can be called friendly in my opinion, but we are comparing to year ago levels with last year being the craziest of years. The marketing’s number was at 101% versus a 98% estimate, placements at 128% versus a 134% estimate, and the on feed at 105% versus a 106% estimate. It remains an uphill battle with packer margins estimating over $700 per head by some. Unfortunately, the demand is telling us to expand, but the only way the producer can gain leverage is liquidation.

We are a few years off from the latest two packing plant expansions, so we hope to hold on to see future days of profitability. Closeouts will possibly reach the levels of losing $200 per head in the coming months if we do not see recovery. I hope to bring you good news next week for a change. Have a good week.

Scott Varilek, Kooima Kooima Varilek Trading

The risk of loss when trading futures and options is substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.