Livestock were mostly lower on Friday morning except nearby live cattle, grains higher.
Cattle Futures Crash: What’s Behind It?
Live and feeder cattle futures saw an ugly close on Thursday with limit down moves in feeders.
Scott Varilek with Kooima Kooima Varilek says the pressure came from fund long liquidation and was continuing on Friday with significant chart damage done.
“We’ve got a lot of new funds into these markets, but they were liquidating these contracts rather than rolling it back, just straight whack out,
taking their ball and going home is the way I heard it. And I think that sums it up. So I don’t know if there’s a reason why,” he explains.
However, he says with the stock market making new highs the fund money may be going towards the equities. “I think that’s just what started the break here and just kind of adding to the pressure as we go down,” he says.
Fund Liquidation Continue
Varilek says the funds may not be done liquidating, especially with the technical damage done in the market. While the long term uptrends are still holding there has been other breaches.
“We break a neckline on the head and shoulders kind of formation. My least favorite formation, but it is what it is right now. I have to acknowledge it. So some severe weakness that measures, you know, another $10 lower here on the fats and, you know, broke some of those short term trend lines. Long term charts are still, hey, we’re at some pretty high levels and we’ve got some significant room we can break before we test those,” he adds.
With prices at record highs he says the selling could get vicious.
“Unhedged guys that want to press their shorts. I mean guys pressed funds pressed along all the way up that’s kind of how it can act on the way down you know stairs up elevator down,” he says.
Fort Morgan Cargill Facility Lockout
While it was not new news the headline of the Cargill beef plant lockout at Fort Morgan, CO also contributed to the break in the market.
Followed by talk on Thursday that another plant in Kansas was looking to strike in sympathy. However, Varilek says that plant is slaughtering today.
“They voted to officially strike this week, and that was the headline. Well, it’s been closed for four weeks, so it didn’t feel like it was anything new to me. It’s just the fact that it just recircled back in there and everybody took it and ran with it. And rumors that another plant might strike to help out could have been part of the reason why we broke so hard yesterday, because that’s not something we need. I had heard rumors that they put concrete barriers all around the Fort Morgan plant, which kind of says, okay, that’s pretty serious,” he describes.
That sends fear into the market about the closing of another beef plant besides Lexington, Neb.
“And the packers still can’t find enough cattle, losing a lot of money, like which plant’s going to close next. So now the fear is, do they just leave it closed? You know, which is, it’s scary.”
Higher Weights, Discounts
Varilek says there was also threats by a major packer that they might start discounting some of the heavy cattle just as USDA releases two week old weight information showing higher weights even though producers have been pulling cattle ahead.
“We’re making them big and and then the weights come out yesterday it’s two week old data we’re expecting these carcass weights to start to mellow and maybe slip a little bit up seven pounds on steers and a five on heifers it was a little bit of a surprise. So, we’re not there yet but just the fact that one packer wants to start to to discount some of those heavies scares the trade,” he says.
Cash Market Disappoints?
Early in the week a regional packer bought some $265 in the North but by Thursday light cash trade was reported at lower levels of $260, which is a disappointment.
“We’ve had some $260 traction picked up quite a bit yesterday and the day before is when it probably started. And those are getting bought for a month out. You’re talking the end of May, $260. It’s getting hard to pass that kind of stuff up when you’re looking at what it was at the time, $7 to $8 basis. And now it’s a $10.50 basis for the end of June. That’s hard not to take.”
Cattle on Feed Positioning
The market was also positioning ahead of the USDA Cattle on Feed Report to be released Friday afternoon.
Average trade guesses have on feed at nearly 102% and placements from 103% to over 104% higher than a year ago and that may have contributed to the selloff.
“I mean, we’re comparing to really tight numbers the year prior. All of these reports, this Mexican border has been shut. We had dry conditions in cow calf country had a lot of cattle coming early off of wheat pasture,” according to Varilek.
So, the next two reports could show big placements. However, Varilek is hopeful the market has absorbed that news already since it has been anticipated.
“So we are penciling a lot of that into the market. So it’s not like we need to do another limit down day because there’s this big placement number, in my opinion,” he states.
Hogs Continue to Fall
Lean hog futures were making new lows for the move again on Friday morning.
Funds have exited a big chunk of their long position so what is the selling tied to?
Varilek says it has been frustrating because hog producers are going to be struggling if this doesn’t turn around.
“I am hearing the packers are not finding enough hogs, having to cancel some Fridays. We’ve got a lot of disease issues. You know, you just hear about another barn right in our area with 60% death loss on this group with PPRS and just, it’s been tough. You know, because the supply is tight, but it just looks like this demand to me just can’t pick up.”
Even at lower prices compared to beef he says pork demand has been lower than expected.
Many contracts have fallen below $100 so he is hopeful the market will catch soon.
Grains Recover Adding War Premium
Grains futures were lower yesterday but ended off session lows with the reversal higher in crude oil.
The market is adding risk or war premium once again fearful of the Iran conflict escalating over the Memorial Day holiday.
“I think there’s a little bit of war posturing. We’re getting a boost in that energy market, and I think that’s probably why we’re getting a little bit of a boost in the grain market here,” he adds.
Grain markets have been seeing pressure without a severe weather threat and the uncertainty over China with no purchases yet or additional details.
The hope is that long term support can hold in the grain markets.
