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Home / Futures Blog / Feeder Cattle Sell Off’s for Dummies

Feeder Cattle Sell Off’s for Dummies

March 21, 2013 by John Payne

This is a sample entry from John Payne’s newsletter, This Week in Grain, published on March 20, 2013.

The liquidation of the livestock industry continues today, led by deferred feeder cattle contracts. I believe much of this is due to the sequestration of meat inspectors. Here is a short and simplified cause/effect chain for those who are new to trading cattle:

  1. No meat inspectors or less meat inspectors = less/slower beef production
  2. Less/slower beef production = less demand for fat cattle to turn into food
  3. Less demand for fat cattle = live fat cattle remains on feed longer, slowing the supply chain
  4. Slower supply chain = less demand for feeder cattle from feed lots
  5. Less demand for feeders = more supply sitting around the cow/calf operation yards (these are the people who feed calves and get them to 800 lbs)
  6. More supply just sitting around, combined with falling prices = industry in crisis

MAJOR EFFECT = LESS PRODUCTION OF MEAT, HIGHER PRICES DOWN THE ROAD

Right now, it’s a circle started by a sudden loss in demand of beef by packers. This doesn’t mean humans aren’t demanding more meat. This loss of demand comes from the slowing of production of beef. The cow/calf operators are the ones getting beat up the most. In the grain business, farmers can simply store grain and wait for better prices. Their risk lies with keeping the grain in good condition. In livestock, we are dealing with live animals. These are investments that have to eat. If they die, they are worth nothing close to what they are when they make it to the end of the supply chain. This leaves the cow/calf guys with two choices:

  • Liquidate the herd, get rid of everything. This is not attractive because the bids from the feed lots are really low (weak basis see #4).
  • Fatten the cattle themselves; cutting out the feeder market and sell on the live market once they are fat. This choice is not any easier. Feed prices are high. That said, I believe operators are making this choice. Cash corn is up 60 cents over the past two weeks. This sudden demand for grain does not fall out of the sky at this time of the year. Someone new is buying feed.

I believe we are seeing a lot of both choices. The market is being flooded with feeder cattle as operators throw in the towel. They are doing this by either moving product or selling futures. These guys are normally the toughest around; they know how to handle risk. But even this break is too much to handle for some. The crush margins are improving, but are still in the red as they have been for months. The silver lining is that the market is doing the government’s job for them. Less cattle being raised = less need for beef inspectors.

The wild card here is the fact that maybe we have too many meat inspectors already (the government wouldn’t hire a bloated staff, would they?) Maybe the administration is just selling fear. Maybe the invisible hand kicks in and the packers start to see some value. Maybe this will be seen in the cash markets as we come out of Lent. The “maybes” are starting to add up. For a market, the only thing worse than bearish fundamentals is uncertainty. This is a perfect example of that belief.

If we could get some certainty and it would result in reversing steps 1-6 above, god bless those who are sitting short this market. The bounce could be ruthless. That said, I’m not so sure the government is going to come to the rescue. I think the safest bet is the prediction that the next 6 trading days are going to be full of fireworks.

APRIL/AUGUST CRUSH SPREAD

April August Crush Spread

FRONT MONTH FEEDERS (WEEKLY/ROLLED)

This Week In Grain

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This Week In Grain - This Week in Grain (T.W.I.G.) is a weekly grain and oilseed commentary newsletter designed to keep grain market participants on the cutting edge, so they can hedge or speculate with more confidence and precision.

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Risk Disclosure

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.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

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 third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

Filed Under: This Week In Grain

About John Payne

John Payne is a Senior Futures & Options Broker and Market Strategist with Daniels Trading. He is the publisher of the grain focused newsletter called This Week in Grain, along with being a co-editor of Andy Daniels’s newsletter, Grain Analyst. He has been working as a series 3 registered broker since 2008.

John graduated from the University of Iowa with a degree in economics. After school, John embarked on a 4 year career with the United States Navy. It was during two tours in Iraq and the Persian Gulf where John realized how important commodities are to the survival of society as we know it. It was this understanding that brought about John’s curiosity in commodities. Upon his honorable discharge in 2007, John’s intense interest in the world of commodities inspired him to move to Chicago and pursue his passion in a career in the futures arena.

After a three year position with a managed futures firm specialized in livestock trading, he was given the opportunity to join the team at Daniels Trading. Being in the business and seeing how other IB’s operated, it was the integrity and straightforward approach of the Daniels management team and brokers that attracted him to make the move. Since joining Daniels, John has broadened his fundamental and technical analysis of the markets even further. John has been writing his newsletter This Week in Grain under the Daniels banner since 2011.

Working in high pressure industries like the military and capital markets, John has learned the value of preparation in times of stress. He believes that instilling within his clients the value of a good plan and a cool head for dealing with the day to day swings of commodity markets. He treats every client as a teammate, understanding that his job is to help clients achieve their goals, whatever they may be.

John is a proud supporter of the Iraq and Afghanistan Veterans of America, the Veterans of Foreign Wars and the National Corn Growers Association. When he is not working, he enjoys athletics of all kinds and spending time with his wife and their two kids.

John’s commentary is featured in the following publications:

* All Ag Radio – Sirius Channel 80
* AM 880 KRVN – Lexington, Nebraska
* RFD TV
* Wall Street Journal
* Barron’s
* China News Daily (English version)

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Risk Disclosure

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.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

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 third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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