Technical indicators are bullish in the meat complex. Beginning last Friday, the cattle complex began rallying with little fundamental information to support the rally except for the announcement from China that it would lift restrictions on some U.S. beef imports.
Cash trade for the week ending December 24 was higher, with Texas being $2-3/cwt higher. Last week’s cattle on feed report was thought to be bearish as on feed estimates were 3% higher, placements were 6% higher and marketings 9% higher than a year ago. However, fund buying defined market activity this week and forced packers to reluctantly pay much higher cash prices.
Feeder cattle are in a strong bull trend and established contract highs this week. Interestingly, feeder cattle continue to rally as corn continues to grind higher. Certainly the corn market found support as questions concerning ethanol tax credits were answered, and although exports remain slow, the global demand for the U.S. corn crop increases. Early estimates of December feedyard placements range from +10% to 25% compared to a year ago.
Lack of moisture has left most wheat producing regions with no opportunity to pasture cattle and as such these cattle have likely found their way into a confined feeding operation. It remains to be seen whether these cattle will be available to the feeder market in the spring or if they have found a permanent home in a finishing operation.
The cattle complex is bullish and has reason to be bullish as we finish 2010; however, we have reached a critical point as we are unable to hedge in breakevens in fat cattle given the current price of feeders and grain. Something will have to change in one or more markets, either the feeder market will have to weaken or the live cattle market will have to establish new highs to justify current input costs.