Sort & Cull

With nearly two weeks still left in the official contest, I suppose it would be premature to count Sean Spicer, the American Healthcare Act, or the Oscar audit team at Price-Waterhouse out of the running.

Nevertheless, there's probably not much risk in predicting the winner of the coveted award "Outstanding Grouch, First Quarter 2017".

May I have a drum roll, please?

Barring a huge upset (or erroneously stuffed envelope), the great market crab of the Jan-Feb period is none other than live cattle futures. Never have such extreme price discounts been so stubbornly defended in the face of absolutely explosive cash and product news.

This state-of-the-art naysaying makes the heirs of Scrooge and Mr. Potter look like cocked-eyed optimists.

Just consider the tidal wave of bullish news the board has somehow managed to successfully stonewall. For starters, the fed cattle cash market has now rallied more than $10 since the first of the year (i.e., generally $117 to $128 basis the 5-area steer average). Since bottoming on February 10, the choice beef cut-out has rocketed nearly $34 higher. Finally, both weekly and monthly trade data has reflected outstanding foreign demand for U.S. beef demand throughout the quarter.

And how has this embarrassment of fundamental riches been received by February, April, and June live futures? With a shrug at best, a sneer at worst.

While the board may now be knocking on the ceiling of a long-held trading range that's struggled $3-9 below feedlot cash since at least mid-February, a late-week breakout (i.e., requiring a solid close over 120 basis spot April) would still leave futures eating country dust to the tune of $8 or more.

So why are nearby live futures so determined to nurse extreme bearish anticipation? Part of it may be a fear of ballooning fed supplies waiting in the second quarter (though larger Nov-Jan placement totals have not been all that alarming). Part of it may be a deep conviction that the impressive level of early year beef demand is simply unsustainable. Part of it may be another sign of futures as a broken mechanism, an antiquated market that no longer serves the hedging needs of commercial longs.

Frankly, I'm at a loss to suggest an explanation that is completely satisfying. And recognizing that basis strength has defied the historical pattern for more than a year only makes the situation more baffling.

Yet for the moment, it may be more interesting (certainly it's less frustrating) to recognize how the board's pronounced price pessimism has ironically worked to stoke cash and product premiums through the first three months of 2017.

On one hand, the discounted market structure has consistently warned feedlot managers to love today and hate tomorrow. By selling aggressively now instead of later, the country has success worked to make tight ready numbers even tighter. Further, this accelerating treadmill has worked to check both carcass size and quality mix, compounding the bullish supply reality (note that the significance of scale tickets and grading sheets deserve even greater respect in this regard, thanks to relatively open winter conditions).

On the other side of the playing field, packers, exporters, retailers, and food managers have seen the same end-of-the-world market structure to cover beef inventory needs later rather than sooner. Such encouragement to procrastinate has kept this team of demand-excited buyers chronically short-bought. The more they wait until the last possible moment to go shopping, the more expensive the front-end of supply becomes.

I know it sounds crazy, but sometimes nothing makes a party rock more than for enough wallflowers to call it dead.

For more of John's commentary, visit http://feelofthemarket.com/…

(ES)

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