CME cattle futures have gone vertical

Gone Vertical Posted on: 5/02/2017 By Cassie Fish, http://cassandrafish.com CME cattle futures have gone vertical the last 7 trading days. Most active Jun LC has gained almost $13 during that time and is eyeing the gap on the spot weekly left by spot Apr LC at $128.30. Futures no longer can ignore their historically large discount to cash prices and are responding with a vengeance to the near $12 cash fed cattle rally that occurred in April. Whether cash cattle prices are higher this week or not (and most assume higher is a given), Jun LC stands $10 discount to last week’s prices and the argument that Jun LC is discount because its trading where cash cattle prices in early July has been diminished to meaningless words. Shorts, especially in options, have panicked in droves the last 3 trading sessions and the option market is portending another huge rally tomorrow. There has been talk of intra-day margin calls as losses for hedgers mount. It is truly a take-no-prisoners, old-fashioned blow off. Even 2014 did not produce as brutal of a rally as this one. The head and shoulders bottom chart formation on many cattle charts has now been fulfilled or overreached at this point. Futures are sharply deviated from moving averages and are overbought by all counts. The extreme nature of this rally is mirroring some of the extreme sell-offs experienced by this market in 2015 and 2016. This rally has been missed by many due to the over-reliance on supply fundamentals and historical probabilities and not enough emphasis on demand, the huge kills and plummeting carcass weights. Speaking of demand, the current boxed beef rally is more of a push, rather than a pull affair- which has not been the case over the last 6 months. Interest in out-front purchases has slowed at current prices levels and trade volume has been lighter than packers would like. This was evident in Monday’s USDA Comprehensive Boxed Beef report and has become even more prevalent this week. Boxes have been muscled higher in the past few days to a new high for 2017, as packers work hard to expand margins. This morning’s quote of $228.77, the new high for the year, is $10 higher than 7 trading days ago, clearly not keeping pace with cash or futures cattle prices. This week’s kill will come in lower than last week’s 624k, partly impacted by weather yesterday and partly due to some packers pulling Saturday kills because of shrinking margins and slowing boxed beef sales. Look for a 605k-618k. Over? It is starting to feel like there is a lot of air underneath this market. But until the last short has blown, it’s difficult to say when, let alone where, this market tops for this run.