Varilek’s Cattle Call by Scott Varilek: Weakness in the futures
The cattle industry has seen a rocky start to the month of May with a more than $10 break in live and feeder cattle futures. To me, Fundamentals were not the main reason for the break, but this is the time of year the cattle market can put in highs and start the search for summer lows.
The funds are still the biggest story of the cattle futures with the liquidation of record long positions. The largest part of a fund roll usually happens the 5th business day of the month prior to a month of expiration. This means Tuesday, May 7 is the potential start of more unwinding which typically lasts for a 5-day period. However, we are already seeing funds exiting ahead of this typical window with a reduction of more than 60,000 contracts in June open interest.
The break in futures had the packers and fed cattle sellers ready to deal. It is a great opportunity for packers to lock inventory up for the month of May by providing positive basis opportunities for feeders. The demand has been outstanding, so the packer loves to have inventory out front. They have effectively sold meat out in front with a supply of cattle in their back pocket. Packer margins have remained extremely positive for nearly a year now.
The main cash that took place was for the first 3 weeks in May. Prices that traded last week was mainly $197-$200/cwt dressed for the week of May 20. That price provided a $9-$10 basis over the June board which seasonally closer to $5 for that week.
Many producers are waiting for a bid for the last week of May or first week of June. It is a great opportunity for feeders to find a positive basis, but because of the high number of producers waiting for that bid, those weeks will fill up fast when sellers dive in to those trades. The 2018 calf crop is almost market ready making a larger supply decreasing leverage opportunities for producers.
The deferred live cattle futures are taking a larger drop than I expected likely led by the decrease in feeder futures. Continued losses in the feedyards may start to weigh on cash feeder prices as we move in to fall, but premiums in the sale barn still exist. We are coming up on the 1-year anniversary since the last string of positive closeouts.
The question that begs an answer is, “how low will it go?” On a typical year we can see a 15-20 percent break from spring high to summer low. When we figure that from the spring high at $130, we can target a $19.50- $26 break in the live cash market by summer or early fall. Remember that is not always the standard, but guidelines are good to have. Do not forget to grill mom a steak this weekend.
Scott Varilek, Kooima Kooima Varilek Trading
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