Major Top For Live Cattle?

Technical analysis suggests December Live Cattle have put in a significant top. While the futures are holding a premium to the cash market, traders are anticipating a drop in production into the fall, but it may not decline as much as expected.

The market may also be underestimating the influence of demand on the price outlook. Pork and poultry are cheap relative to beef, beef remains high-priced relative to the last 15 years, and consumer confidence is deteriorating. Consumers are facing higher living expenses across the board, and this appears to be hurting demand. With budgets pinched, consumers may cut back on higher-priced beef cuts. The USDA boxed beef cutout values are at the lowest level since March 31, 2021.

December cattle broke out to the downside this week, and the market looks vulnerable to significant long liquidation if support levels are violated. Open interest remains high, and large and small speculators held a net long position of 84,217 contracts in today’s Commitments of Traders report. With beef prices low and falling, it may be a stretch to expect the cash cattle market to trend higher over the near term.

U of M Consumer Sentiment Index
Daily Boxed Beef Cutout

Traders have remained hopeful that the drop in fourth-quarter production from last year could spark a major rally in the cash market, but there are several factors that could pull production higher:

  • With the futures trading at a large premium to the cash market, there will be an incentive feed cattle to higher weights, which could boost beef production.
  • The drought in the plains has reemerged over the past month, leaving producers in South Dakota, Nebraska, and Kansas in a very tough position. Pasture and range conditions in Kansas were rated 78% poor to very poor this week. Extremely high hay prices and limited supply make it difficult to hold cattle through the winter. This increases the incentive to slaughter all types of cattle, including cows.
  • Feeder cattle could move onto feedlots sooner, which would increase beef production over the near term.

The sharp break this week has left the market in a short-term oversold condition. Perhaps a more stable financial market this coming week will allow for a technical bounce to sell.

US 4th Quarter Beef Production

Originally Published September 23, 2022

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