Sell the Rally?

Feeder Cattle futures contracts rallied last week as shown in the figure above. Prices for the October Feeder Cattle contract rose approximately $5 between the Tuesday close and the Friday close. The story was similar for other contract months, too, including the March contract.

The rally can be attributed to “good news” from multiple sources. Strong packer demand pushed live cattle prices higher and led feeder cattle futures higher, too. There were also developments in the feeder cattle markets that are providing support for feeder prices. The timing of this particular rally is intriguing for multiple reasons. The rally goes against normal seasonal trends. Typically, feeder prices weaken this time of year due to larger supplies of calves being sold.

The USDA released the World Agricultural Supply and Demand Estimates (WASDE) on Wednesday. The WASDE estimated an even larger supply of corn than expected which could suggest continued lower prices of the primary feed ingredient. Corn futures prices reacted as expected and were 4 to 5 percent lower at week’s end. We have previously discussed the inverse relationship between corn price and feeder cattle prices (available here).

Winter wheat planting prospects are also very good. To be fair, it is very early with planting just now underway. However, moisture conditions in most of the major wheat planting areas are in great shape which is spurring stocker demand for winter calves based on grazing potential.

This is also a week between two significant reports. The next Cattle on Feed report will be released on September 21. On the heels of the “abundant corn” WASDE estimates, this COF has implications for stocker buyers and feeder cattle futures prices. The current price of the March 2019 futures contract is favorable for many stockers wishing to lock-in a price above break-even levels using typical spring basis estimates. A COF report showing larger-than-expected placements could weaken these Spring futures prices.

So where does that leave producers trying to decide whether this is the week to buy or sell? Was last week the start of a multi-week rally? Or did markets overreact and the gains will be quickly erased? There is no way to know for sure, but the stronger futures prices are likely to spark cash market buyer interest this week – especially for those buyers who manage price risk. For producers with calves to sell, stronger buyer interest is a good development. That good development should have many considering now as a possible time to sell.

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