The live (LEJ25) and feeder cattle (GFH25) futures markets and the cash cattle (LEY00) market are scoring all-time highs on a near-perfect storm of bullish supply and demand fundamentals. February live cattle futures (LEG25) this week set a record intraday high of $209.15 a hundredweight. January feeder cattle futures (GFF25) hit a new intraday high of $282.25. The USDA reported on Monday that last week’s average cash cattle trading price hit another record high, up $5.52 from the previous week at $209.19. That’s the 10th consecutive week of higher average cash cattle prices.
Beef packers are better situated on near-term slaughter needs at present but cattle in feedlots remain current and feedlot operators still have negotiating power. Even higher average cash cattle trade prices later this week cannot be ruled out.
In last week’s monthly USDA cattle-on-feed report, the agency estimated there were 11.823 million head of cattle in large U.S. feedlots (1,000-plus head) as of Jan. 1. That is down 107,000 head from one year ago and 71,000 head less than livestock market analysts expected. Lower feedlot numbers were due to a 3.3% decline in cattle placed on feed in December. Meantime, the report showed cattle marketings increased 1.0% during December. The cattle placements figure in the data was deemed as the bullish catalyst helping to push prices higher this week.
The cattle-on-feed report suggests it’s likely the cyclical shortage of fed cattle supplies will continue in the coming weeks. However, weekly cattle slaughter numbers tend to turn higher in mid- to late March, which is why fed cattle prices have historically tended to post annual cash market highs around that time frame.
Consumer demand for beef at the meat counter remains strong, as seen by the elevated boxed beef cutout values. Choice-grade beef cutout values have hit record winter highs above $330.00. Also, the latest Consumer Price Index data showed December beef steak prices were down 0.2% annually, even though overall beef prices rose 4.8% annually.
The feeder cattle market continues to be supported by the U.S. ban on cattle imports from Mexico due to the new screwworm disease in Mexican cattle. However, feeder cattle market bulls are becoming concerned about the sustained upside price potential for feeders due to the recent rally in corn futures prices.
How Much More Upside Is There in Cattle Prices?
This week’s big surge in live and feeder cattle futures prices showed significantly bigger daily price movements. That is indicative of climaxing price moves in very mature bull markets. To put it another way, the cattle futures markets are likely closer to market tops from a time perspective, even if there is still more upside in the near term.
Veteran traders know that trying to pick tops in commodity futures markets is extremely dangerous. For those traders reckoning the cattle markets are close to topping out, purchasing put options on cattle futures would be the more prudent course of action, as opposed to naked shorting. Keep in mind the higher volatility seen in cattle futures recently will make the purchase of options on cattle futures more expensive.
A Bearish Cattle Market Fundamental May Be Lurking
A keener “risk-off” tone in the general marketplace earlier this week did not take too much wind out of the cattle futures markets bulls. The U.S. stock market saw a strong selloff Monday, led by the tech sector. Additional selling pressure in the U.S. stock market in the near term would likely begin to erode consumer confidence, which would mean less demand for beef at the meat counter.
Also, profit taking and weak long liquidation from the shorter-term cattle futures traders will likely be featured as soon as late this week. Short-term oscillators are showing the cattle futures markets as being short-term overbought and due for downside price corrections very soon.
What to Watch Next
This Friday’s USDA annual cattle inventory report will provide the next new data points for cattle traders to digest. The agency’s inventory survey provides data that includes estimates of the number of breeding animals for beef and milk production as well as the number of heifers being held for breeding herd replacement. Estimates of cattle and calves being raised for meat production are also included. The number of calves born during the previous year is also measured.
