This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on August 22, 2016.
Weekly Cattle Commentary 8/19/2016
Cattle on Feed follow through will be monitored with cold storage and livestock slaughter released after the close today. I see the report from Friday as slightly bearish relative to expectations. The placements and marketing’s came in only slightly above estimates but the report did show that we have a 4 year high when it comes to total head on feed. I wish my take were different but I do not see much of an opportunity for a late summer rally without the packers surprising and bidding up for product, which seems unlikely. The only thing that bulls can hang on to right now is the premium to cash over future, that is real as cash prices last week proved. That said, I would expect the gap in October Live at 109 to get filled before any rebound back into the high teens comes about. The good news is that we have seen prices trade just below 120 and if the outside markets would support some inflation, I think we could see 120 taken out on cash sometime later in the year. The problem I see with the market comes from my interactions with producers. It feels like everyone is in the same boat. They are waiting for higher prices and are increasing carcass weights as they wait. I think a lot of producers have a deadline this fall for production liquidation and will buy their next round based off how the fat prices finish off the quarter. If prices would finish on a high note, I think we see Feeders go on bid later in the fall. If the live cattle markets expire on a weak note, then I don’t think there will be as many feeder cattle bid for later in the year as producers will adjust their numbers on feed. That behavior would be the makings of a bottom, but prices may take a while to catch up. Regardless, the speculative position remains nil, which provides opportunity for rally if the conditions would allow.
Commentary contributed by John Payne.
Confirmed cash sales for Friday came in at 117 live and 185 dressed. Trade for the week ranged from 117 to 119 Live and 185 to 187 dressed. That puts confirmed cash 3.5$ over August futures and 7$ over October futures. Remember August took over as lead month with a 10$ discount. The week ending Aug 6th showed carcass weights up 3# at 886#, and 9# below last year’s weights. I would suggest the 9# reduction from last year is an outlier at this point, referencing a sharp increase last year and not necessarily a decrease this year. Let’s see what next week brings.
I will let John speak in detail to the Cattle on Feed. I will say that I have read several web sites suggesting the COF was neutral. I personally struggle with that theory. It may not be limit down bad, but it definitely didn’t have any good news in it. If nothing else, it probably gives the market permission to proceed as it was before, in a generally lower direction. As always, the market’s reaction to the COF is much more important than my humble, and often erroneous assessment. We will know more by Monday morning.
October Live sold off all of this week, establishing the low trade and low close on Friday. It appears likely that the market will fill the initiating gap left around 109. This may be wishful thinking, but given cash’s ability to hold between 115 and 120 so far, I do not expect a new low, or at least not by much.
For hedged clients we are back at the basis game and would recommend trying to aggressively sell cash cattle near the lows (if practical), take profit on puts, and possibly re-own with calls.
Feeder Cattle’s seasonal upside has essentially played out. Generally speaking, I start looking for opportunities to hedge next year’s production after the 10th of Aug. However, given the already low prices, I am not looking for substantially lower prices either. Somewhere between 138 and 133 on the bottom side would not be a surprise. Spending the rest of the year chopping around between 150 and 133 would seem to make sense. Also, as mentioned above, I view the Cattle on Feed as at least slightly negative.
September feeders sold off all week with Friday posting a reversal, closing .70$ up on the day after establishing new lows for the move. This was probably shorts taking profits before the weekend and COF. It was not supported by a reversal in Live cattle. I still believe that the yearly lows will hold, or if breached only marginally. The technical impediments above us at 151 (September) look even more intimidating now, with the 200 day moving average, May 151 resistance, and a 61.8% Fibonacci retracement for the year all commencing on this point.
Short term trend is negative.
Moving averages are still positive but the 10 day has rolled back over.
Stochastics are still giving a sell signal.
Down Side Targets (September)
Support at 138.1
Initiating gat at 137
The yearly low of 133.15
The nearest top side resistance sits at 149.975
About 2 weeks ago, for aggressive hedgers we rolled 144 August puts up to 147, spending 1$ and staying in August. Friday some of those clients used the new found value in the 147 puts to move out to Sept/Oct. A few remaining clients are sticking with the 147 Aug. These are functioning almost as short 147 futures at this point. Staying in Aug is a high risk, high reward scenario.
The bulk of the rest of our clients already used the opportunity of higher prices to roll out into September or October.
Note: Anticipating that the lows will hold is not a recommendation to remove hedges. Hedging is about the “what ifs”, mainly, what if I am wrong. We will be looking to roll puts down, maybe even aggressively to out of the money puts, but we will not be recommending going naked.
Watch for a potential improvement in basis as we near the lower end of the range mentioned before. If that occurs aggressively sell cash (where practical) and re-own with calls.
Some of our clients and myself re-owned 2016 sold production with August calls back in June. We exited these positions 2 weeks ago, adding a little profit to the previous cash sale. If we get a reversal of some type between 138 and 133, I may try re-owning 2016 sold production with calls one more time.
Contact one of the Daniels Trading brokers below for ideas on where to initiate hedges if your 2016 production is not already covered, or to transfer risk out of the cash and into calls.
September Feeder chart sourced from RJO Vantage 8/19/2016
September 2016 Corn chart sourced from RJO Vantage 8/21/2016
October Live chart sourced from RJO Vantage 8/19/2016
For more information or to sign up for current updates contact:
- Donna Hughes (email@example.com)
- Kirk Donsbach (firstname.lastname@example.org)
- John Payne (email@example.com)
Try The Cattleman’s Advisory for 60 Days
The Cattleman’s Advisory Trial - The Cattleman’s Advisory is a newsletter designed for producers of cattle by a producer of cattle. All subscribers can expect a weekly update of the Fundamental and Technical conditions of the cattle markets, setting the table for the week ahead.
The Cattleman’s Advisory includes an email newsletter subscription.
The Cattleman’s Advisory trial lasts 60 days.
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.