Market Outlook
What is the strong basis telling us?By Dennis Smith
As I type this column June live cattle futures are trading between $216 and $218 with the cash steer market in the south trading at $2.23 cwt and as high as $2.35 cwt in the north. So the basis is running from $6 to $18. The basis becomes overly dramatic the further out you go in time. August live cattle futures are trading below $2.10. October through April futures are hovering on either side of $208. This powerful strong basis is not due to a lack of interest. As of the close on June 3, total live cattle open interest stands at 410,300 contracts compared to 288,800 contracts last year. That’s a 42% increase in total open interest.
The futures market, anticipatory in nature, is signaling that cattle prices will move lower for the remainder of the year and into 2026. With the calf crop at record lows and the border with Mexico closed due to New World screwworm infestations, everyone agrees that cattle numbers will get smaller, not larger into next year. What could possibly go wrong? What is the market worried about?
Consider the following bullets which are all factual.
As of May 1 on feed inventory is down 2% from last year at 11.4 million head.
Average dressed cattle weights continue to run record high.
Beef production is projected at 26.4 billion pounds this year, down 1.9% from 2024.
Exports are projected to decline 12% this year.
Imports are projected to rise 9% this year. Imports are twice as large as exports.
Per Capita beef supply is projected to be unchanged this year at 59.1 pounds.
The supply of 150+ cattle is 28% of total on-feed vs 5-yr average of 16%.
Retail beef prices have been record high for more than 12 consecutive months.
Beef packer processing margins have been highly unprofitable for several months.
Years ago a highly experienced old time trader told me to never forget about the person that is consuming the commodity that you’re trading. The data confirms that the U.S. consumer is worried about their financial future. Credit card debt is soaring. Consumer confidence is in the tank. It’s well known that U.S. consumers prefer beef. The pork industry has been frustrated with this fact for years. However, when faced with serious budget concerns and uncertainty, consumers do have other choices which include pork, poultry and pasta.
The futures market, which is made up of thousands of players with millions of dollars at risk, is signaling that a shift downward in the demand curve for beef is occurring. It’s also well known that measuring demand, or changes in demand is the most difficult aspect of fundamental analysis. While very few in the industry have much sympathy for the beef packers, the fact that they’ve just suffered (during May) one of their worst months ever should be a concern for all. Beef packers, like the rest of us, are in business to make money. Losses of this magnitude, if they persist, will force painful changes.
While there is no real shortage of beef, there is a shortage of cattle numbers. The industry is currently faced with over capacity. Packers have the ability to kill and process far more cattle than what is available and what will be available for the foreseeable future. As seasonal demand has spiked, packers have been competing for fewer numbers. They’ve decided to cut the kills which have occurred for the last seven weeks, reducing production right into the teeth of rising seasonal demand. Their strategy, evidently, was to jack up wholesale beef prices in an effort to improve margins. The strategy simply did not work. While wholesale beef prices edged upward, they did not soar nearly high enough to make ends meet. Now, seasonal demand is peaking. What happens when demand peaks and cutout values tumble? In my opinion, this is exactly what the futures market is worried about.
Technically, watch the August live cattle contract for a close below $206.00. In addition, a close below the 50-day moving average, currently at $204.00, would confirm a major top in live cattle futures. The market scored a key reversal on May 14 which has never been nullified to date. The strong basis is very good for beef producers. The problem, however, is that sharply discounted futures makes it most difficult to establish any kind of attractive hedge. The other major problem facing producers is record high feeder cattle prices, forcing projected break-even into record high territory well into the future. Producers are reaping handsome profits currently but danger lies ahead.
Smith publishes his evening livestock wire daily. For a free 30-day trial, contact him at dennissmith9805@gmail.com.
