Whew, what a week. While grain markets gave both sides of the trade something to smile/frown about, the cattle markets were one-sided all week as selling was relentless. Fundamentally, the price action on Friday makes little sense to me. Yes, cash was lower, we saw 127 trades in Texas and the Feeder index is lower by about 5.00 with a close into the 152 area. But Box beef cutout levels remain just below last week’s levels amidst a very quiet week in the Choice cutout. What baffles me is the continued selling amidst a massive selloff in CBOT feed prices. The argument all week from everyone I read was suddenly higher feed costs were creating a disincentive to buy feeder cattle, and prices were cheaper because of it. Unfortunately for cattle bulls, that logic didn’t hold on Friday. Feeder and Live cattle markets plummeted off a weaker cash trade and jitters ahead of the Cattle on Feed Report. The good news is the price break has put packer margins back into the black. The feeling is the producer scars from last summer are showing as price failures are encouraging selling instead of value buying. Cattle on Feed came out on the close of biz, which was friendly from the fundamentalist opinion as was the cold storage report. I expect with cheaper feed prices the inverted market to take hold and rally the front of the curve into the April delivery.
- On feed = 1% higher than last year (on expectations)
- Placements were 5% higher (7% expected)
- Marketings were 7% higher (7% expected)
- Beef stocks 466 million lbs. vs 490 million lbs. expected.
Fundamental commentary contributed by John Payne (firstname.lastname@example.org)
Fundamentally; additional comments by Kirk
I concur with Mr. Payne’s take on the Cattle on Feed. I see no way the Beef Stocks number is not fundamentally good news. The Markets reaction Monday will tell us if it agrees.
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. By taking out the Dec lows late last week, the minor bull market starting in December is technically dead. 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. Friday we recommended rolling June Live Cattle 126 puts down at slightly better than a 1:3 ratio. Those that rolled 126 puts down to 115 puts profited just short of $7 and now sit with June 115 puts. We will be aggressively rolling June 115 puts up at a 1:3 or 1:4 ratio if given the chance. If we can accomplish 1:4 up one time we will be protecting approximately the same equivalent cash price with only 1$ of the client’s money at risk in the hedge, vs 3.5 originally. (119 strike + 7 cash = 126 protection level) We also rolled 124 puts down to 115 puts Friday. These ratios were marginal, but the clients felt comfortable taking the risk. Moore Research has a seasonal buy for December Live cattle starting April 20th. Watch the markets Monday for an emotional shift, brought on by the Cold storage report (hopefully).
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. Similar to Live, the minor bull market starting in Dec, is technically dead as Friday took out the Dec lows. 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 negative, consolidated for a few days, and finished ugly. This negates all of the reversals and support levels. All week feeders struggled to maintain any bullish momentum, with only one day managing to close slightly better than even. Right now the May technicals are 99% negative. The only positive is that we are so negative, we are overdue a correction.
Short term trend is negative.
Moving averages are negative.
Down Side Targets
Have all been met and surpassed.
The next levels of support sit in the low 130s, but that was is 2012 and 2013.
Topside Targets (longer term)
I still am childishly hopeful for the gap at 173 up to the October high at 184, but the market needs to build A LOT of bullish momentum, and of course, get through major resistance at 166.
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.
For those not hedged currently, I would look to place initial hedges somewhere between 154 and 166. Any reversal between these levels I hedge aggressively and hope I am wrong.
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, and not recommending to take profit to the down side until we can work a 1:4 ratio. Friday some clients chose to roll down at 1:3. I did not, but I did recommended leveraging out of the money calls against our deep in the money puts. We did not recommend exceeding 1.5$ per put in place. This will not do a great job of protecting very much of the put profits, but divided by the number of puts, costs less than 1.5$ of protection if the market continues lower. Rolling down would have cost us 4$ of protection. Although I loved the idea of rolling down Friday, giving up $4 of protection, at this level, is a risk my breakeven simply can’t afford, nor a majority of our clients.
For Cattle to be sold by the end of May, with hedges in place starting around the 162 May level, 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 makes it back to 166, 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). With the COF and Cold Storage bullish to mildly bullish, I strongly urge producers to review this strategy.
May Feeder chart sourced from RJO Vantage 4/22/2016
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