Looking to the Futures

Live cattle futures (/LE) and feeder cattle futures (/GF) spent almost all of Monday’s trading session at their lower price limits. Live cattle settled at $214.45/cwt on Friday and spent almost all of Monday limit-down by $7.50 at $207.20, with a high of $207.625. Volume was about a quarter of the 50-day volume average. The feeder cattle contract couldn’t get off the mat at all on Monday, spending the entire session at the low limit of $304.975, down $9.25 from Friday’s settlement, though interestingly volume was only down about half from the average. For Tuesday’s trading, the CME expanded the daily price limits, to $10.75 for live cattle and $13.75 for feeder cattle. In choppy trading Tuesday morning, both products traded at the lowest levels since June before recovering slightly.

A catalyst for the selloffs was an announcement from one of the major meat packers. Tyson Foods announced a significant reduction in its cattle slaughter operations on Friday. The company will close its Lexington, Nebraska beef processing facility and reduce its Amarillo, Texas plant to a single shift. While the company took pains to say it will increase production elsewhere, the reductions are significant. The changes will reduce nationwide slaughter capacity by 7,000 to 8,000 head per day, or up to 9% of the national total. Tyson plans to close the Lexington plant and reduce production in Amarillo on January 20th.

The reduction in demand for beef on the hoof comes a week after an indirect increase in supply for both live cattle and processed beef. On Friday November 14th, President Trump amended the reciprocal tariff executive order from April. The amendment removed the 10% tariff on beef, plus other agricultural goods. Additionally, the president removed the 40% tariff on Brazilian food products. Brazil is the third-largest source of beef imports after Australia and Canada.

Looking at the bigger picture, the cattle market is in a unique position. Just last month, the contracts reached all time highs, with live cattle hitting $248.30 and feeder cattle reaching $383.70. That was the result of resilient consumer demand and record low supplies. Following several years of drought, the January cattle herd census showed the lowest herd size since 1951 at 86.7 million. There was a slight recovery by the July report, with 94.2 million head marking the lowest population for mid-year since 1973.

Live cattle futures have spent most of the year in a long rally with a few deep breaths to allow the simple moving averages to catch up to the contract before reaching the all-time high last month. Since that peak in mid-October the market has sold off steadily.  There was a bearish double-cross on October 28th with the 9-day crossing below the 20- and 50-day SMAs, followed by the 20 moving below the 50 a week later. The selloff has seen the RSI break into oversold levels three different times, including Monday’s move. The DMI shows a strong bearish trend with no sign of relief yet.

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