Grain and hog markets were lower early Friday with cattle higher.
Cattle Extend Rally
Live and feeder cattle futures were higher early Friday seeing follow through buying after a higher close on Thursday.
Cattle futures could post higher weekly closes but is this recovery sustainable?
Scott Varilek with Kooima Kooima Varilek says the recovery this week feels good as it has been mostly quiet regarding bearish news headlines.
“Every day, grinding out several days in a row where we hold and build a bit of a base and now finding some confidence. And I wish I could say, hey, this is funds coming in the market and wanting to be long, but we’re not there yet.”
He is not confident in the long speculator coming back into the cattle market because open interest has been falling.
“The last three days, open interest just got smashed at 13,000 contracts out of the market. I think this is just some of these funds or some of these shorts that have been hanging on in the market taking some profits,” he explains.
He says it’s also the wrong time of year to build confidence in a rally.
Cash Trade the Key
The other positive is that cash trade improved at the end of last week with packers paying $222 to $223 in the South. Due to confidentiality that did not get reflected in the five area weighted steer price of $219.06, down $.19 from the previous week.
That had left hopes of higher cash this week, in addition to the tight supplies, and the higher asking prices have reflected that.
The cash news has been quiet so far and Varilek is concerned the producer is still lacking leverage especially with higher numbers in the North and the fact that last week’s bids were three weeks out.
“We’ve got that fall run here and we’ve got a lot of extra weight on them. Our cost of gains have been cheap, you know, maybe growing a little bit still benefits us to put the extra weight on. So we lose a little bit of leverage in the North. So we’re below the South. Not a surprise.”
The Joslin, Illinois plant closure is also taken away leverage as those negotiated cattle have to find their way into other packing plants, most notably Dakota City, Neb.
“We’ve got a lot of producers that need to negotiate some cattle. We’re independent cattle cash negotiators up here and we’ve got to find a home for some of these cattle. So, we’re hoping for a lot of packer interest. You know, we just had a little $220 last week from some regionals and that was it. And now we go through this whole week and it’s pretty quiet. The only thing I’m really hearing right now is just some $345 meat bids out there, which is okay.” he explains.
He adds the cattle are yielding well at 64% and higher and cattle are clean, which is positive. The negative is freight is high.
Cash Feeder Strong
The cash feeder market has stayed strong, which Varilek says is positive as during the six year bull run feeders have been the leaders.
“Now it’s the true test. We get the yearlings coming off of grass in the North. Their performance is outstanding. Liking how the guys that normally want to buy yearlings are saying, man, I can’t touch these things. That feels good. That’s some of the stuff that we remember. We’ve got some optimism out there. It looks like the corporates are running really hard after these yearlings. It’s not necessarily the farmer feeders that are running out there. And maybe partly because they’re getting some higher grain prices than they’ve had.”
Some calves are also starting to come to town earlier than expected with cattle that would normally sell in October already selling the first and second week in September due to dry conditions.
“Hay prices are high. We didn’t get enough rain to really, you know, keep that grass, you know, that lush grass going. So some of those dry conditions starting to pull some of these calves early. And I think we’ll get a pretty good test here. There’s a lot of optimism there,” he adds.
Technicals Looking Good Enough to Attract the Funds?
The technicals on live and feeder cattle are looking better but what chart points are the funds watching to instill confidence and drive them back into the market to buy?
“We’ve had three nice big sharp legs lower if you’re looking at a chart in that old Elliott wave formation. When markets correct from a certain level, they’ll do it in three legs and then they chop a little bit before they start a recovery. We’ve had those big three legs and that’s just kind of part of the confidence here,” he says.
So Varilek is watching those levels before he trusts the bottom is in and thinks it will take another $5 to $10 rally to attract fund buyers.
Source of Beef Imports Confirmed
While news headlines were quiet this week President Trump did confirm that the additional 300,000 metric tons of beef imports would be sourced from Brazil and Argentina.
That was no surprise to market analysts or anyone in the cattle industry but the market is still trying to determine how much of the 220 million pounds a month is actually being imported.
“It’s early to tell how much is coming in compared to what they have sent us in the past,” he says.
Varilek is skeptical either country can ramp up slaughter fast enough to import the increased volume.
“So, it’s going to have to come other areas as well. I am just starting have that feeling they’re not going to be able to get this done,” he adds.
Still, the record amounts of beef already being imported into the U.S. has already taken its toll.
Fort Morgan Running
The Cargill plant in Fort Morgan, CO. is back up and running and starting last Thursday they were harvesting about 1,000 head a day.
Varilek says it will take a few weeks to ramp up to full capacity. “Yeah, I’m thinking it’s expected that it’s a slow start. You know, had to get some workers back. They had lost some workers, some upper management. You know, another packer was kind of bragging how, well, they hired a lot of their workers away. So, yeah, going in the right direction anyway.”
Douglas, Ariz. Port Back Open
The Douglas, Ariz. port was also seeing Mexican feeder cattle crossing after chute problems last week took volume down to only 100 head.
Varilek says, “And I still think feeders want to come up here. You know, the price that they’re getting for them down there and what we’re willing to pay up here are quite different. So there’s a lot of incentive for them to want to pull them ahead.”
The market is also preparing for the additional ports that will open in the coming week.
Hog Market Struggling to Get Traction
Lean hog futures were lower as well on Friday morning after running into chart resistance, despite the big discounts futures are holding to the Lean Hog Index. Cutouts were also down nearly $2 coming into the session.
Varilek says the market has been sloppy and October is likely to stay supported aligning with the index, but it will be done through bull spreading.
“It’s been a buy low, sell high kind of market. There’s not a major trend there and really nothing to shift it. The news over there seems pretty quiet. So all focus is on cattle and grains because there’s so much going on and hogs are just the one. Hey, we don’t have much happening here and and I think producers have been able to fill some barns at a much better price. So kind of getting that steady flow back together. And I think that’s why we’re just seeing a little bit of a sideways trade action here,” he explains.
Grains See Pre-Report Profit Taking
Grains had a strong day on Thursday with soybeans making new contract highs. However, the markets were seeing profit taking pressure heading into the USDA reports.
Varilek says with funds near to record long it is natural for them to take some money off the table especially with questions swirling regarding yield.
“Doesn’t surprise me that they take some of those support lines out just to kind of keep us all nervous and on edge because I think we are
all nervous and on edge. I mean, there’s so much uncertainty with the yields.”
He says this report uses objective yield data so that makes it even more interesting.
“I’m just nervous that the USDA doesn’t pull them down as much as I want.”
