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The market has seen a decent correction off of the highs and open interest is beginning to come down from the highest level in near 15 months. The market continues to find selling pressure on rallies due to slow employment news and ideas that consumer and restaurant demand for higher-priced beef cuts will remain at recession levels. However, while demand news is expected to remain weak, supply is still a potential positive force into the end of the year as slaughter levels taper off. In addition, the December futures are trading discount to the cash market and this will help clean-up any backlog of cattle in the country as producers have an incentive to move cattle now before cash markets slip. The market inched higher in quiet trade yesterday. Strength in other commodity markets and a surge higher in the US stock market helped to provide some support. News of fewer restrictions on exports to Taiwan along with some improvement in beef prices and ideas that production will begin to decline ahead helped to provide some support. The estimated cattle slaughter came in at 121,000 head yesterday. This was up from 119,000 last week and up from 111,000 a year ago as this time. This is the second day in a row in which slaughter came in below trade expectations and this would indicate a weakening demand structure from the packer. Packer margins remain deep in the red and this means that either beef prices need to remain in a short-term uptrend or that cash cattle needs to move to a lower price in order to revive packer demand. Boxed beef cutout values were up 73 cents at mid-session yesterday and closed 15 cents higher at $140.93. This was down from $141.63 a week ago. Last year, beef prices moved from this level to a peak of near $158 before a resumption of the downtrend in the depths of the recession. Beef production in the 4th quarter is expected to be down 1.4% from last year. More importantly, the drop in production from the 3rd quarter into the 4th quarter is expected to be the third largest decline in the last 21 years.
TODAY’S GUIDANCE: The market remains in a short-term downtrend as traders wait for either beef prices to move higher or cash cattle to come lower with packer margins deep in the red. Last year, beef prices rallied sharply at this time of the year so we would not rule out higher beef ahead. February cattle buying support comes in at 85.62 with 87.30 as resistance and 88.87 as upside target.
