Cattle Futures Correct But a Higher Week Confirms the Lows: Grains Explode Higher

Cattle markets were lower to start Friday with grain and hog futures higher.

Cattle See Profit Taking
Cattle futures were up four days in a row and started Friday lower on profit taking and having run into chart resistance.

Scott Varilek with Kooima Kooima Varilek says the feeder cattle ran into the 50% retracement level on some contracts got above those areas but then saw profit taking.

“I don’t think we have any major trends to follow right now. We’re not in a big major downtrend or a big uptrend. It’s feeling a little sloppy. So these day-to-day moves up and down, kind of getting used to it a little bit. We’ve put a lot on this market, so to see it down a little bit on this Friday, that doesn’t surprise me,” he says.

Higher Weekly Closes
The cattle futures are working on higher weekly closes, which would negate the downtrends after the $20 losses in live cattle the last two weeks.

Varilek says the look and feel of the futures market has changed substantially since last Friday and seasonally may have bottomed a little earlier than normal.

“We had a lot of halfway retracements you know kind of measured in we quickly busted right through those yesterday aking some of that out, those resistant levels. So starting to feel okay here a little bit on a chart and wondering, hey, is this a time that we can rally?”

Higher Cash the Missing Piece
Fundamentally the piece missing for Varilek is the cash trade. Some light trade took place in Iowa on Thursday at $210 and $335, so no trend.

Varilek says last week packers were offering $210 late in the week and then bids moved down to $208 and then bids dried up as packers claimed they were full.

This week at least three major packers have been bidding $210. “So if you have to get rid of your cattle they’re way too big, get them gone but now it’s tougher today because last week these futures were down to $211.50 and suddenly $218 and change or $219 that gets tougher that basis kind of left us,” he adds.

He points out December live cattle futures don’t have to stay with what the northern cash is.

“It’s a market for December or what we’re going to be in the end of December. And I think when we get past these numbers, we’re going to feel a lot better. We just have to get through them. And it’s always a long, bloody trail. But we do have, you know, we’re not cleaned up. We’re not there yet.”

And even when bought cattle have been setting in yards another 30 days and packers are using that as leverage he adds. “So it’s going to be a little sloppy here. I can’t confidently stand up and say, we’re clean, let’s go. We can go higher. It’s just not there yet.”

Weights were also at record levels on the weekly report with good feeding weather and cheap feed, which Varilek explains was not discounted previously but now a few packers are steering away from those cattle as they don’t fit the specifications needed for their contracts.

Feeder Cattle Cash Index Rising
The feeder cattle cash index was also up $3.31 on Thursday at $333.92 and is projected to be up another $4.30 on Friday. Varilek says that has been driving the feeder cattle futures and is part of the reason the market bottomed.

Sales at Bassett, Neb. and Mobridge, S.D. have reported really strong prices.

“Which surprises me because, we’re losing on cattle on feed and our closeouts are negative. You know, you’re seeing some $500 head range kind of losses. And so it surprises me how strong that is. So it’s still some optimism. It’s still tight numbers in effect,” he adds.

Canadian Feeding Demand
Varilek says the Canadian feedlots are buying a lot of the northern cattle and have been the last couple of months and he’s been hearing that especially from Montana sale barns.

“They’ve got 15% more cattle on feed up there in Canada right now than a year ago level. So that’s growing. Plus they have heifer retention. The government is pouring money into that industry to try to float it. So they have a lot of feed, and they’re trying to promote cattle on feed. So they’re down here with government money,” he explains.

Canadian feedlots are buying with break evens at $260 for U.S. feeders who can’t afford to pay that much.

“We’re independent in the United States and the cattle industry. We believe in capitalism rather than government money. But that’s kind of thereason we’re seeing them down here buying these feeders the way they are.”

Lean Hog Volume Rising to Forge a Low?
Lean hog futures were back higher on Friday but even the days the market has pulled back this week the volume has been rising.

For Varilek that is the first sign the market is bottoming. “We’ve had a big open interest number as the trend has just been down and adding shorts, adding shorts. But now your daily volumes are huge. You can’t say, well, it’s the cash market starting to firm.”

In fact cash has been down this week and negotiated hogs on a national basis closed at $39.64 Thursday. Varilek points out only 1,582 head traded which is less than one finishing barn.

“So when we quote cash hogs, I always kind of just feel, does that really matter? So that’s kind of back to my point. I will steer towards the volume on the market, to determine a low.”

Grains Explode Higher, Confirming Bottom?
Grains were sharply higher on Friday morning reversing nearly all of Thursday’s losses.

Strong weekly exports for corn at 113.4 million bushels were a marketing year high and Mexico bought another 11.9 million Friday morning.

Weekly exports on soybeans were solid at 42.4 million and there were several flash sales including 4.9 million bushels to China, 4.4 million to Vietnam and 3.7 million to unknown.

Varilek thinks Thursday’s selloff was overdone and is resulting in some technical buying and short covering but he adds the market has gone low enough.

“I think we’re in the time of the year where we can put in that bottom. You know, we had the bullish WASDE report. We have some good exports and the demand is kind of there,” he adds.

The one headwind in the U.S. dollar index at 19-month highs and that is what pressured the grains Thursday especially as the Brazilian real sinks.

Inflation Trade
He also thinks there could be some inflation concerns starting to resurface and that often brings funds in to buy grains.

Higher Weekly Closes
The grains are working on higher weekly closes, at least for corn and soybeans, and that would also be a sign the lows are in.