Live cattle were lower again Wednesday, with feeders and hogs higher. Grains all ended lower.
Live Cattle Down....Again
Live cattle futures were lower again on Wednesday and have spent several consecutive days under the 100-day moving average.
Is this starting to look like more than a healthy correction?
Brad Kooima with Kooima Kooima Varilek says, “I think that we put in seasonal highs. It wouldn’t be the first time that the market broke a little bit this time of year. Now, in that raging bull market of last year, you betcha, we rallied right into July and August. It feels like
we’re coming from a different place now.”
He points to a softer beef market after July 4th, which is the normal seasonal. Very poor packer margins have made packers dig in to avoid paying higher money for cash cattle and there’s been a lack of bids being offered this week.
“And it just doesn’t feel like there’s a packer that’s out there that has to be very aggressive. Maybe one, but it takes more than one to
establish a market. It looks like the rest of them are pretty full for July, using up some formula cattle, using up some contract cattle, and trying to do their best to improve margin,” he says. And the Fort Morgan plant is still dark.
August live cattle did hold the old lows and are above the long-term uptrend line, plus they are oversold.
So he’s hopeful for a correction. “But I’m more of the mood that we have to sell rallies for a while.”
Big Futures Discount
August futures are also over a $17 discount to the cash, which should provide some support.
“It’s much more difficult to break a market that is discounted like this one is, thankfully. I would remind everyone that we almost had an
identical basis last year. We’re getting almost used to this real soft basis where the futures are much, much, much below cash. And if you had cattle that are about ready the futures are telling me I should sell cattle because the market thinks we’re going to go lower.”
He is hearing the opposite in the country, which is to make the cattle work they have to make them big.
“Replacement feeder cattle are too high priced to buy, feed is relatively cheap even with the little bounce we just had in the corn. You have the same recipe that we did say in 2015 with high break evens,” he says.
So, he is keeping and eye on the weights. Typically the weights bottom now and go a little bit higher.
How is Beef Demand?
Kooima says demand for beef hasn’t crumbled and some of the middle meats are priced down into consumption again.
“However, it is the time of year where it’s a hamburger, hot dog feature and not a middle meat feature.”
Feeders Recover, Close Above Key Support
Feeder cattle futures had a volatile day with more than a $10.50 trading range.
While feeders fell below the 100-day moving average support during the session, they reversed and closed higher for the day and back above that critical support.
Kooima says the cash market has continue to bring the futures back from the brink.
“You know, I’m seeing posts saying what’s going on at Bassett, Nebraska. They’ve got a huge sale today, 9,000, and they are higher than a giraffe’s dentist, okay? And good for those guys that are selling them. But, you know, the inherent strength and I think what you’re
seeing here is you’re seeing a feeder that has had great success. He seems to be quite confident that he can pay whatever he wants to for feeder cattle,” he adds.
So the strong cash supports the front end of the board. The oversold market condition helped bring the market back, along with the break in corn futures.
“Normally the feeder cattle futures would stay pretty good until the first week of August that would be your seasonal highs. So, I think the edge is off the feeders too, but their charts look much, much better than the live cattle charts,” he states.
Are Funds Liquidating Cattle Futures?
The other concern is the funds seem to be shedding their big long position similar to June.
“We spent quite a bit of time talking about it, how we lost so much open interest when the June roll was happening. So the next thing is today was the day one of the Goldman roll for August. So I’m curious whether you’re still going to have some of these fund managers and whatever long speculators that might say, I’m tired of getting whipped around here with the news,” he says.
That could mean they liquidate.
Hogs Stage Huge Rally
Lean hog futures were sharply higher on Wednesday, with a surprise short covering rally.
Kooima says, “It’s been a long time since we closed above the 40-day moving average. Obviously the bigfeature to this big break, as you know, has been, fund selling. People say, well, when are those funds going to get out? And well, unfortunately, the market has to get them out.”
August lean hogs closed above the 40 day for the first time since about May 8th. So, he expects a drop in the open interest tomorrow
morning and that’ll indicate short covering.
“They’re still a giant short. So let’s see if we can’t get these August hogs back to like $103, which would be halfway back to this big leg
down that we’ve had. One would think that, you know, priced where we are here going into summertime that we could get a little bounce,” he adds.
Soybeans Fade China News
Soybeans made new highs for the move, got above the $12 mark and got China confirmation of 17.3 million bushels of export business.
However, the market saw profit taking and “buy the rumor or sell the fact” reaction.
Plus, soybeans hit resistance around $12 and could not close above it, but when the market finally does. Kooima says, “We’d have a chance at $12.60 to $12.80.”
Corn, Wheat See Profit Taking
Corn also saw profit taking after hitting chart resistance at the 50% retracement level according to Kooima.
A noon forecast that showed more moderate heat also pressured futures.
What does the market need to push through those levels?
Kooima says a turn in the weather back to hot and dry or China purchases may get Dec corn back above $4.65.
“That could trigger a run back toward $5.” he says.
However, a rally in July doesn’t happen often and it hasn’t happened since 2012.
“It did happen in 10, 11, and 12. All three of the years that had tightened, all 10 tight ending stocks years. So then it got a little bit dry and the market really reacted. Now that the ending stocks on the beans are relatively snug, they aren’t at all in the corn. Okay, so I think we got our work cut out for it. But if the weather flips, we’ll see.”
