Grain and livestock futures were mostly lower early Friday.
Cattle Crash With Cash
Live and feeder cattle futures were making fresh lows for the move in what has been another tough down week for the market.
Scott Varilek with Kooima Kooima Varilek says the outside market news has been a factor but the main catalyst for the selling has been sharply lower cash trade which started breaking early in the week.
“This cash market is the leader. I mean, that’s the problem. We’ve got cattle to clean up seasonally in the north. We know that the weights are record large. We finally got one too many. And that was kind of always the thought when we get one too many and the packers got the leverage,” he explains.
Producers have recognized the problems and have the attitude they need to get current and so they have been taking lower fed cash bids.
Sharply Lower Cash
Last week’s cash averaged $223.73 in the north, down $3.35 from the previous week.
This week cash has traded light at $218 in the south so far but the volume was light as northern cattle were being bought cheaper and hauled south to fill the holes in those plants, according to Varilek.
In the north there is a wide range in prices from $208 to $219 live and $332 to $340 dressed. However, Varilek says the volume live is around $214 and they are heading south which is expensive with higher freight costs.
“That $214 triggered right away there was some $340 in the in the meat so that’s all happening and then you’ve got some other majors that are down there bidding $210 or $330 in the meat that’s kind of the bids that we’re left with,” he adds.
Varilek says the pain of cleaning up will likely last through Thanksgiving or after.
Cash Feeders Also Falling
Feeder cattle futures are under pressure even with the sizable discount to the feeder cattle cash index is holding to the nearby contracts.
The index has cooled with the softer cash at the sale barns and stood at $342.76 on Thursday down $3.82 and was expected to be down another $5.50 on Friday.
Varilek says the cash feeder market has been what started and drove the rally the last several years.
“And now that’s finally, you know, having some troubles here. And that’s not great in my book, you know, cheering for those cow-calf guys. But, you know, we’ve got a bunch of balling calves that are hitting some of these sale barns. We’ve got really muddy yards, big losses on these closeouts you know there’s not a lot of
excitement to jump right back in,” he explains.
He says break evens are $210 to $211 so that is finally starting to work with the lower cash feeders. However, he doesn’t like the structure of the market right now for the cow calf producers.
“You look at the spring feeders, they were premium to what these fall prices were not too long ago. And now they’re falling out of bed. And if we can’t get the cash feeders to catch now during our highest quality feeders and these northern sales, that makes me pretty nervous for for those spring feeders,” he adds.
Stock Market Melt Down Spills Over
While not the main reason for the break in cattle, it did not help to have the melt down in the stock market on Thursday as the S&P dropped 335 points.
Varilek says, “When you have a stock market doing that kind of stuff, the fact that that’s not holding, not seeing any stability there, you know, it’s not helping either. Not not at all. You know, the energy reversed back higher. The stock market’s down. That’s just another negative feather that we got in our cap here.”
Will Cattle Take Out the August Lows?
The cattle charts have been beat up and Thursday December live cattle filled $217.50 gap area left after the September Cattle on Feed report and closed below it. Varilek says the deferred months followed.
So will futures go back and retest the August lows?
Varilek says the futures could do that and even test the next support area.
“What I was looking at in particular was last November when we had a pretty sizable correction and thought that the market was over. This is the big one. You know, there was some contracts that got sold for $1.99 underneath $2 at that time. And it was about November 24 when it finally turned around and went higher. So yes, that’s why we’re all kind of standing on,” he says.
Hogs See More Contract Lows
Lean hog futures were lower again on Friday with relentless fund selling that has pushed the market deeper into contract lows.
The selling pressure in cattle and the melt down in the stock market don’t help but the cash and cutouts can’t find a bottom either. The market is in free fall.
Varilek says, “You’ve got open interest that’s higher than what the live cattle open interest is. So there’s some pretty substantial short positions in this market that are, keeping this trend going. And you’ve got weaker cash. You’ve got weaker cutouts. You know, that’s what we’re looking at.”
Hog producers are losing a lot of money on this turn and isowean feeder prices are really dropping. So, producers have the ability to fill barns with cheaper replacements but Varilek says they’re still
electing to sit on their hands and wait for cheaper prices.
“Plus, you’ve got some deferred prices that are still up there which means there still could be some hedge pressure that comes on those back months that are carrying a premium,” he says.
Demand a Problem for Pork
However, the upfront problem for the industry is pork and the hog futures aren’t moving even at one fifth of the price of cattle.
“I mean, there’s just such a big demand problem there that that industry needs to take a long, hard look at it. You know how to cook pork. How to sell pork,” he adds.
Grains Under Pressure
Grain markets were also under pressure on fund selling.
Soybeans saw closes under the 200-day moving average on Thursday which opened the door to additional selling pressure. Plus, the market is fearful of higher yields in the WASDE next week.
Wheat futures were falling with a higher dollar index and the tri-lateral peace talk meeting between the U.S., Ukraine and Russia on November 10-11.
Varilek points out these are value levels for the grains and demand should start to ramp up and hold prices soon. Plus, funds have liquidated their long in corn and are already short in wheat.
