The July 2022 Cattle and Livestock Slaughter reports confirm that drought over the last two years has quickened the liquidation of beef cattle across the western and southern plains in the United States. In June 2021, I published “A Drought Tipping Point and the Price of Beef” with a technical analysis on Feeder Cattle and the Live Cattle futures chart. Updated charts are provided today and here is an excerpt from last year’s article:
“A majority of city dwellers probably take for granted the supply chain responsible for farm-to-table food available at the local grocery store, and that process is not rocket science. A prolonged drought takes its toll on the soil as plants struggle to bloom or don’t grow at all. If plants and grassland are not blossoming, cattle are unable to graze on the food that nature designed them to consume… My guess is that the price of beef at your local grocery store or butcher has found a base price after mitigating problems in the supply chain due to the pandemic. Although, as the drought continues and livestock are culled, relocated, or sent to early slaughter, the price per pound will remain stable due to a glut, but a price spike will occur in the near future due to a lowered supply.” – TraderStef
The severe drought this year is forcing ranchers to sell their cow herds at an extraordinary pace. According to Texas A&M, there hasn’t been this kind of movement of cows to market since 2011. Cattle ranchers in California, Colorado, New Mexico, and Texas have been particularly hard hit. The Rio Grande river has run dry in Albuquerque for the first time in 40 years, and water levels in Lake Mead are at their lowest since April 1937.
Heat Wave Hits U.S. Farms, Stressing Crops and Ranchers’ Herds… “The prices that ranchers receive for their cattle have climbed roughly 15% from a year ago, according to the USDA, but producers are still struggling to break even. Prices for hay, which is widely used to feed cattle, were 56% higher in April than in 2021, according to a June report from the Federal Reserve Bank of Kansas City. Cattle producers are estimated to have lost money the past two months, according to a cost-and-return analysis from Iowa State University.” – WSJ, Jul. 23
U.S. Drought Map Courtesy of Drought Monitor – Jul. 19
U.S. Soil Moister Courtesy of Windy– Jul. 25
Wildfire threat persists, fueled by drought, triple-digit temperatures… “With 99% of Texas experiencing some level of drought, critically to extremely dry vegetation and critical fire weather continue to support significant wildfires, according to Texas A&M Forest Service release.” – Beef Magazine, Jul. 20
Drought is a major contributor to the liquidation of cattle, but inflation has become a key risk for independent ranchers and feedlot operators as consumer spending is collapsing with recessionary pressures on their doorstep. Retail meat prices were 18% higher in May compared to 2021, and spot market supplies and freezer inventories remained below pre-pandemic levels. A combination of tight supply and steady demand kept meat prices 20% higher vs. the five-year average for March through May. The unusual increase in the culling of cattle this summer due to poor pasture conditions and higher feed costs will create a temporary supply glut for several months. Meat prices at your local grocery store will trend lower in late summer and early fall, but prices will rise again as excess supply is sold off by 2023.
Cattle Slaughter Chart Courtesy of The Cattle Range – Jul. 21
Drought impacts advancing rapidly… “From the recent peak in 2018, the July beef cow inventory has declined by 6.3%, or a total of 2.05 million head. The July inventory of beef replacement heifers was down by 3.5% year over year. Feeder cattle supplies are estimated from the sum of inventories of other heifers and steers (over 500 pounds) plus calves (under 500 pounds) minus cattle on feed. The estimated July 1 feeder supply was down 2.7% from last year.” – Beef Producer, Jul. 25
Texas Cattle Trailer Traffic Jams to Sale Barn Markets – Shepherdess, Jul 12
Texas ranchers rush to sell livestock amid drought – KSAT 12, Jul. 19
$COW is a new ETF since 2017 that trades on thin volume and tracks an index of lean hogs and cattle futures contracts. There are no other investment options in cattle for the retail trader. Professional traders utilize cattle futures and options to speculate. Let’s move on to the charts. To view a larger version of any chart below, right-click on it and choose your “view image” option.
Live Cattle Futures – monthly chart as of Jul. 25, 2022 4pm ET…
Excerpt from the Jun. 28, 2021 weekly chart analysis:
“Overhead resistance is the downward trendline drawn back to the 2017 high…. take note of the 61.8% Fibonacci. There is no significant resistance until $152 if $136 is taken out with conviction on price and Volume.”
The downward trendline was taken out in Aug. 2021. A rally within the Up Channel breached the overhead 61.8% Fibonacci level and a high of $144 printed in Feb. 2022. The subsequent pullback has pivoted back to the 61.8% Fibonacci and printed a high of $138 as of today. There will likely be resistance at $144 or near $152 as a glut of meat supply impacts the market. After excess inventory is sold off this fall, a rally could match or exceed the 2014 high in 2023.
Feeder Cattle Futures – monthly as of Jul. 25, 2022 40m ET…
Excerpt from the Jun. 28, 2021 weekly chart analysis:
“Overhead lateral resistance at $160/163 is drawn back to 2012, and sits just above the 38.2% Fibonacci at $158 and the Inverse Head & Shoulders Neckline support at $149. The DMI-ADX is working on a bullish Alligator Tongue setup with price action above the 50 EMA. There will likely be a period of chop before any attempt is made at decisively taking out $163. If it breaches resistance on strength in both price and Volume, there is no significant resistance until $191.”
There were several months of chop in the low $160s before a breakout in the last two months. The price action printed a high of $182 yesterday and closed at $179 today. The rally within the Up Channel appears to be on its way to the 61.8% Fibonacci level around $191. There will likely be resistance as the price approaches $191 and a glut of beef impacts the market. After excess inventory is sold off, a rally could match the all-time high price levels seen in 2014.
$COW iPath Series B – Weekly chart as of Jul. 25, 2022 4pm ET…
Excerpt from the Jun. 28, 2021 weekly chart analysis:
“Resistance on COW is between $40 and $40.50 and includes the Fibonacci 50% level… Support rests at $35. The price has trended above the 50 Exponential Moving Average (EMA) since Jan. 2021. Price action will likely remain choppy until the futures breach or fail their respective resistance levels.”
I must emphasize that daily volume on COW lacks liquidity for trading large positions and tracks the price of lean hogs in addition to beef cattle. The price action has been choppy as expected, and resistance at $40.50 formed the topside trendline for a Broadening Formation, Right-Angled and Ascending pattern. Its lower lateral trendline rests at $35. The price is struggling to stay above the 50 EMA, but the StochRSI is hinting that a near-term rally might challenge the Broadening Formation’s topside trendline. A substantial rally in COW is unlikely until the upcoming beef supply gut wanes and cattle futures lift-off in late fall or early 2023.
I suggest waiting for lower beef prices at retail during the supply glut before stocking your freezer for the holidays and next winter.
Selling Calves at Auction – From Ranch to Market – Our Wyoming Life
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@TraderStef on Twitter & Gab / Website: TraderStef.com
