The spot cash market has been the leader in the markets over the last several weeks with tremendous strength, setting several new all-time highs in the spot cash market. After Posting a high-water mark of $186.00 last week in the southern region, the packers finally seem to have: 1. Gotten more inventory around them and 2. pushed the retail meat prices (cutout) higher to get margin back into their favor. The week of 6/12 we saw the first decline in the spot cash price at $182.00 in the Kansas, Texas, and Oklahoma region which was $4.00 off the previous week’s highs. With the historically strong basis (we covered basis in a previous blog post), weakness in the spot cash market will likely lead to weakness in the futures market. However, as the markets get closer to the futures contract expiration, the convergence will bring the markets together. Because of this convergence, feedlot risk managers are eager to market their cattle and capture the historically wide basis. This leads to weakening of the markets because of willing sellers.
The blue line on top is the spot Cash Market and the black line on the bottom is the August Futures market. The current Basis is $8 to $10 over the 3-year average and $8 over the 5- & 10-year averages. This Improves the profitability of hedgers cattle from $100 to $150 per head. One thing is for sure in the cattle markets, every year is unique and has characteristics that resemble other years in our history and often we look to those years to get a glimpse of what the current year may be trying to tell us.
The above chart is the August 2023 LC in Blue and the 2017 August LC in purple. If 2017 is any indication we can expect weakening markets from the 4th of July into the end of August. With the overall tight supplies of fat cattle available, the rate of decrease will likely be more moderate into expiration.