Ag markets were lower Friday morning with the exception of soybeans.
Cattle Fall, More Than a Healthy Correction?
Cattle futures were down sharply again on Friday and live cattle have been down every day except Monday after the bullish Cattle on Feed report.
Is this more than just profit taking and a healthy correction?
Scott Varilek with Kooima Kooima Varilek says the rally out of the report was disappointing and did not last long indicating a possible exhaustion on the charts.
“When you have a market that’s that overbought and then you get some more really good news on it, you expect, hey, are we going to see the funds run in and buy this market? We’ve often heard about numbers, lines in the sand where the funds will jump in. Really just didn’t see it. The open interest number stays small.”
Varilek says the market doesn’t have the big fund length to help push the market higher which is part of the struggle.
Holding Support, For Now
So far the futures were holding support areas including the uptrend lines Varilek has been watching.
“We’ve still got, you know, $4 to $5 on the feeders for this uptrend line that they’re on. And, you know, we’re still doing okay. But as quick as this is, you know, it’s just like your stairs up and then the elevator down. Once it starts tipping and you get that correction. This is how it happens. And that’s kind of the frustrating part of it, Michelle.”
The December live cattle futures were holding the 100-day moving average but that area may not hold on Friday and is being closely watched.
He adds that when the December futures are trading underneath what next June spring cattle prices are, that’s a negative sign.
“That means our full spreads aren’t going to work. That can set us up for some trouble. Now, we just dipped below June here in the last few days, but that’s an old cowboy rule of thumb that we’ve talked about for as long as I’ve been here, 15 plus years.”
Futures Drug Down By Cash
The cattle futures broke earlier in the week with lower cash trade.
Northern dressed business was reported on Wednesday at $350 to $352, which was $7 to $9 lower than last week and prices ranged from $348 up to $360. Live sale prices ranged from $223 to $226.
Varilek says the cash in the north has been sluggish for weeks, so he was expecting the break in the futures.
“It just kept rallying, we kept getting overbought and charging through,” he explains.
Northern Cash Sluggish
That’s because southern cash has been outperforming the north and some $228 has been reported again this week on the new South Central cash report.
“We have the north that they’re trying to move cattle and and you know packers helping us keep them out in the yard. Hey I’m going to push these back a week, I’m not going to pick these up right away,” he says.
That is part of the reason cattle are so big and getting backed up. The show lists are also higher after packers only bought 40,000 head of negotiated cattle last week and that tipped leverage to the packer.
“We had a few $225 trade then it was $224 and now $223 yesterday and I think there’s a line there’s more guys that would take $223 if we kind of get it. So there’s hat attitude that guys want to sell. I had customers call me and say that they already sold the cattle normally they’re bouncing bids off me,” he adds.
Margins Squeezed
Producers want to get the cattle out of the yards and they aren’t making any money on this turn.
“The other problem these closeouts are coming in and they’re they’re negative losing some money in the cattle feeding industry here and and that’s starting to drag on just a little bit. So, we’re putting the extra pounds on to try to help that out. And that’s helping, but it’s not enough to make this a profitable situation.”
The fear is does this start to spillover to the cash feeder market?
“Trying to fill these yards after they just took a loss will be difficult. Now you’re going to buy a break even that’s much higher or somewhat higher. Maybe it’s not as much as it used to be, but higher than what you just sold your fats for. And that’s usually setting up for a tough turn again,” Varilek explains.
South Central Report “No Help”
This was the first week USDA released the regional negotiated cash trade report that included Texas, Kansas, Colorado, Oklahoma and New Mexico.
The result was one day with 112 head traded at $228.
Varilek says the report is no help to the market. “Big deal. I think they hide behind the word transparency you know. We’re doing it for you guys and that’s just so they can set their formula prices. They need other cash to look at. You know, they don’t want to change the way that they trade cattle down there. So, sure, go ahead, expand your region, see what you can find. But I just think that’s such a shrinking market out there that I don’t know that this is going to really fix them that long.”
He says USDA and the industry needs to take a long hard look at this and do something better.
“Do we need to change the way we do business here? Are we just going to, you know, let the packer price these cattle for us and we don’t have any say in it? So I don’t think that it changes much.”
He also fears that other states like South Dakota that still trade negotiated cattle might be under more scrutiny and pulled into formulas.
“We know what the cash market is and we know that those meat bids are quite different as well. Reasons being different plants yield different. You know, some plants get really poor yields. Some get really good yields. So a $360 at one plant might not be as good as a $350 at another plant. So, I mean, there’s reasons that those prices are so much different. We know that in the industry. We know what the cash is,” he concludes.
NWS Cases Ramp Up
NWS cases have started to climb and Arizona has a case in a dog this week. However, that isn’t changing the border reopening schedule.
Columbus, New Mexico opened on October 26 and more will follow as USDA has a standard protocol in place.
“It’s such a good system that I think we’re feeling okay about that I don’t think that this suddenly changes it and says, we got to close the border. I mean, that would be the really bullish part if it happens. So to me, I don’t think that’s making enough news for us to say we need to try to shut that border or anything. I still think we’re full force ahead on getting more cattle across here.”
Hogs Can Hold
Lean hog futures bounced off of six year lows on Thursday on short covering and USDA’s announcement of product purchases that will include pork but it amounts to only about a day of production.
So, there was no follow through on Friday and no indication of a bottom according to Varilek.
“It feels too early just being in October. And that’s the scary part of it is we’ve got a down trending market, you know, in severe fashion here.”
The deferred contracts have been holding up better than the nearby futures but they can’t lift the entire board he says. Plus cash trade and cutouts need to carve out bottoms and both are at multi-year lows.
Corn Fails
Corn ended off its lows Thursday as wheat rallied on news China was looking for bids on SRW wheat and that provided hope they may also be looking to buy corn at some point.
However, the market saw little follow through buying with the weight of harvest and hedge pressure as farmers are selling with high storage costs. So the ownership is shifting hands to commercials. However, he says it is cheap to reown bushels on the board and calls are cheaper than storage.
Although he thinks $4.50 will hold on the Dec corn due to end user buying especially with strong ethanol margins.
Soybeans Pop on Export Buys
Soybeans were trying to recover Friday after new lows for the move.
Flash sales amounting to 10.9 million bushels to unknown destinations is supportive. Plus, first notice day liquidation on November futures is subsiding after traders were trying to get out of the way for delivery.
Varilek says this is the end of the month which could also be a factor but a shift in trend won’t be apparent until the market sees more recovery, so he’ll be watching that next week.
