Excess pork keeps bulls reigned in, while cash cattle experience a drop in production
This week's kill may step down to 620,000 head or so. Even though that is down from the general range in the fall, from 623,000 - 648,000 head, it is large for this time of year. This number would be 9% over last year. Lower supplies will be seen in the weeks up ahead, and prices will be higher, but the short term situation is more mixed than straight out bullish
We say that even though last week was a winner for cash cattle. Last week's average price was $117.91, up from $117.46 the previous week. For weeks we have noted that while the long-term demand situation is improving the short term is a problem. There is no change in that discussion point after today's weekly Comprehensive Boxed Beef report. In six of the past seven weeks, end users have purchased less beef than last year for extended delivery. Today's report, covering last week's activity, shows volume purchased was 5% under last year. That marks four weeks in a row of lower numbers.
We just traded $119 and $120 cash cattle last week. February futures imply only $120 cash trade. Given the drop in production in the weeks ahead, seasonally, it appears the February and April futures are undervalued.
As part of the coming Allendale AgLeaders Conference in January, we will be discussing this "expansion based meat tonnage" issue a bit. This will be both a beef supply discussion as well as a total supply discussion. In addition, and probably even more important, will be the related discussion on the market's ability to accept it. We are not concerned about any major price drop for 2018. There may be some concerns about pricing and profitability in 2019 and 2020.
As you can see we are taking a very balanced approach to 2018. More supply will be partially offset by more demand. We suspect there is a contingent of traders that are rip-roaring ready to buy for "another chance at a rally like spring 2017". Whether based on fundamentals or not, we are wary of standing in front of them. For this particular instance, our fundamental discussion fits in with their viewpoint as well. Buys we are talking about here are specific and targeted. $124 is our target for April futures.