Ag markets leaned higher Wednesday except corn and deferred lean hogs.
Cattle Extend Gains a Third Day
Cattle futures ended higher on Wednesday except the December live cattle contract which was under pressure due to the Goldman roll.
This marked the third higher day in cattle futures so did that confirm a short term bottom?
Brad Kooima of Kooima Kooima Varilek says a market that moves three days against the last trend often confirms a low. “And, you know, the last trend has certainly been lower by the $20 sell off in seven or eight trading days. This is the third day up with the exclusion of December live cattle.”
Cash Lower With Heavy Weights
Kooima says there has been a disconnect in the market with the futures moving higher despite the sharply lower cash trade. The average was down $8.30 last week at $215.43 and that trade was solely made up of northern cattle.
Cash has been down the last two weeks due to heavy weight cattle in the North according to Kooima. However, northern cattle have been bought and hauled as far south as Texas. He says that’s because those cattle grade higher.
“Now, is there a tsunami and an overwhelming number of these big cattle? I’d say no, but the cattle that we have are big and you know the packer knows the same thing so he’s kind of feeling like the feedlot doesn’t have a lot of leverage and unfortunately,”
However, he points out in only a couple of weeks cattle numbers will get very tight again.
“I would love for the packers to come in and scoop up inventory and take it all on. I could get pretty fundamentally friendly very quickly,” he says.
Cash Trade This Week?
Last week’s weighted average was something $214 in Iowa last week but by Friday the bids fell to $210.
Kooima is hoping for better than that this week. “I thought maybe we could maybe trade some cash at $212, which depends on how you define whether that was higher or lower. I’d say that was better than what I could have done Friday. Maybe not as good as we could have done earlier in the week. But hopefully we get it.”
He says on Wednesday at least three packers were bidding $210 so far which Kooima says is a good sign that they want to participate.
Will the Futures Rally Help the Cash?
So the hope is the rally in the futures board will give producers some leverage in the cash market.
Kooima says, “I’m wondering what the basis trader thinks. If you’re hedged and you had these cattle at $219 you know $212 is not going to seem like near enough. So, you could maybe get the old holding action rally again, which we’ve had holding action for a long time already. I don’t know if we can do much more of that, but we’ll see.”
He says the North isn’t known for being heavily hedged either, where the negotiations are taking place.
Tyson to Add Second Shift at Amarillo
One piece of news that helped spark the rally starting Monday was that Tyson was working with Allied Beef to add a second shift to the Amarillo, Texas facility.
However, how helpful will that expanded capacity really be to the market?
Kooima is pessimistic that it will be a game changer for producers.
“First of all is it a little telling to anyone that the packer decides that by June there’s going to be enough cattle to kill a second shift?”
He says that is directly tied to more Mexican cattle being imported into the southern U.S.
Plus, Kooima says the second shift will be mostly formula cattle. “So it’s not going to do anything for price discovery. And I hope I’m wrong with that. But that’s the story I’ve heard from what I think is pretty reliable folks. I think it makes a good headline I don’t think it changes anything in terms of any real change in the market.”
Higher Prices in 2027?
So how long will it take to clean up the heavier cattle and get to the marketing hole left from three months of record low placements?
Kooima is looking for the market to bottom around Thanksgiving into the first week of December and then rally into 1Q of 2027 with heifers being retained instead of place in feedlots.
“So instead of placing that heifer, putting her in a feedlot, we’ve got we’re getting it set up to become a cow. So I still think there’s supply side friendly news for the first quarter, especially later on in the first quarter.”
He says seasonals are problematic, especially since COVID.
“Typically, the first week of December, Thanksgiving, around there, you see the shift into the middle meats, the let’s feature the tenderloins, the prime ribs, the Christmas, the get-togethers, the family, New Year’s. And that actually carries through increasing beef demand all the way until a couple of weeks before the Super Bowl. That would be the seasonal on the demand side of it. Now, will it be as good as it’s been the last few years? We’ll just have to wait and see.”
However retail prices are off their highs, which should help make beef more attractive.
Technical Proof of a Low in Cattle
Technically, what is he watching to confirm the low is in and get funds to jump back into the futures?
“The 38% on the Dec, so it was halfway back on the June. You know, if we start knocking out some of those retracement levels, I guess where the open interest now is on the Febs, I guess I’d like to see a close someplace back above $225. I think then you could maybe get the funds even to come back a little bit. That’s a couple of dollars away, you know, two and a half dollars away. So it’s going to take a little bit more than this.”
Until then he says the caution flag is out.
Kooima Calls a Hog Bottom
December lean hogs were up for a second day, while the deferreds were lower once again.
Kooima says he is calling a bottom in the market due to the technical reversal on the charts and the modest follow through buying.
He says market sentiment has also turned bearish and that’s when markets generally turn. Plus, the funds are record short so he hopes that will eventually spur some short covering. “I mean who’s left to sell it down here?”
Demand a Head Scratcher
He says the poor pork demand is a head scratcher and there are ample supplies. Negotiated hogs are down to 40 cent in the Western Corn Belt, so prices should be low enough to spur some demand.
Grains Bottoming?
Grains were mostly higher except for a penny loss in Dec corn. However, Kooima thinks the low was also confirmed in the grain markets with USDA’s November report.
“It’s the right time of year. This isn’t a good time to be bearish, this point in harvest seasonally. The numbers were helpful. I wouldn’t blame anybody for being a bit of a skeptic here on the USDA numbers. I mean, jacking them around this, you know, up and down. Now, statistically, I guess if they lower the October one,
11 out of 15 in the last 15 years, they’ve also lowered next month. So we got that going for us, I guess,” he explains.
He thinks corn yield could also go lower based on the way the basis is acting.
“You’re already getting a bit of a tip off here that the supply of the corn is not quite the big burdensome one that people think it was. So, you know, after breaking it over a dollar bushel with wheat feeling a little bit better, I think we can come back out of here.”
The key is at least getting the funds to stop selling.
