It was another rough week in cattle futures, this time spurred by not only perceived higher feed costs but a falling cash market as well. There were a few Live sales reported Friday around 123 to 124. Box beef closed the week at 212, shedding 10 dollars from last week’s close +222. The feeder index fell as well from the low 150’s into the mid 140’s. The index traded was reported to me this morning near 142. All in all, it was a really poor week for both cash and futures. Fundamentally, it doesn’t feel like there should be this much bloodshed, especially with packers margins back in the black. It feels to me like an unwind trade that had speculators long what eats (feeders) and short what has been fed (corn, wheat, soymeal). As the corn and soymeal prices reversed and spiked, those who were spec long on the margins because of a perceived need of feeder cattle for corn use purposes lifted the long side of the feeder trade. Folks I work with in the south western growing regions tell me they are having a hard time finding a home for corn. I feel the market is oversold on feeders but until the fat cattle markets find some footing or the grain markets fall apart, Feeders will most likely remain shunned by the fund speculators. May starts a new month, the bulls hope prices can perform better than April when we saw a 14 dollar sell off in May feeders and a 10 dollar correction in June cattle.
Fundamental commentary contributed by John Payne (email@example.com)
Live Cattle: I still feel that the market will challenge the March highs before the spring beef market has concluded. The market is in an oversold condition, but excluding the COF, has given us no reason to call a bottom. Our hope now is to start another minor bull market as we push into the big BBQ holidays. Any upside will be limited by the engulfing major bear market which started in mid-2015. Mid-week we tried to roll our puts up at a 1:4 ratio, but we didn’t get it done. We will continue to be aggressive at rolling June puts up at a 1:3 or 1:4 ratio if given the chance. To repeat last week’s comments, if we can roll up one time at 1:4 we have a combined profit and protection level equivalent to where we started with only $1 of the client’s money at risk. Moore Research has a seasonal buy for December Live cattle starting April 20th. We got a small emotional shift brought on by the USDA reports, but it quickly fizzled. Of note, Live Cattle have not taken out the proceeding lows.
Feeder Cattle have a substantial amount of seasonal upside left to them (May – June). That’s relative to time, not necessarily to price. Feeder cattle are in an oversold condition. Technically, the market has given us no reason to call for a bottom, even though I cannot give up on the idea that we are much closer to a bottom than a top. Moore Research has a seasonal buy for August feeder cattle starting April 20th.
May feeders started the week positive but ran into overhead resistance and the down trend line, and collapsed. With Thursdays limit down day and a close at the day’s lows, taking out support and the yearly low, one would have to assume we are going to try for last week’s down side target in the low 130s. Fridays action didn’t do anything to threaten this bear market. I hope I am wrong. Right now the May technicals are 99% negative. The only positive is that we are so negative, we are overdue for a correction. We need to close above the down trend line before we can assume any confidence in mounting a sustainable rally.
Short term trend is negative.
Moving averages are negative.
Down Side Targets
The next level of support sits in the low 130s, established in 2012 and 2013.
Topside Targets (longer term)
I still am childishly hopeful for the gap at 173 up to the October high at 184. This appears to be a long shot, but I am still hopeful. I will definitely be losing some hedge money before we get to this level.
Given the extent of the selloff from resistance at 166, our first goal will be to get back to minor resistance at 155 and then major resistance at 166.
Contact one of the listed Daniels Trading brokers below for ideas on where to initiate hedges if your 2016 production is not already covered .
All options have been rolled down at least one time, covering the cost of the hedge. As we are using house money at this time, and the budgetary consequences of further weakness is severe, we will be letting hedges work. Out of the money calls have been leveraged against deep in the money puts. Friday, clients with 150 calls were able to roll down to 144 calls at a cost of $1.1. We are working orders to roll all calls down 1:6, and will continue to do so until this market proves us wrong. The clients that were able to roll their calls down Friday have now protected $10 of put profit, while only sacrificing 1/6 of their protection. This still leaves approximately $4 of put profit at risk, but that is the cost of maximizing protection. It is mathematically impossible to maintain near maximum downside protection and protect 100% of put profits. I have been considering rolling puts down at around a 1:6 ratio. The 154 May feeder puts would need another $4 to $6 of profit to achieve this. This would be a math based decision and not a bet on the market. We will keep clients informed as we finalize this decision.
For Cattle to be sold by the end of May, with profitable hedges in place, I would look to maximize basis and put value by forward contracting in this down market. I would buy the cattle back with May calls. I realize this is counter intuitive, but if it works you are locking in a better basis than you will probably receive if the market rallies back, and with the calls in place you may be able to double dip a little bit of the market. Worst case is you lose the call premium but you sold the cattle. (the calls are losers because the market didn’t go up)
May Feeder chart sourced from RJO Vantage 5/2/2016
Due to technical difficulties chart sourced Monday 5/2/2016
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