Cattle fundamentals suffered again last week amidst a retracement on the charts. Box beef choice is back near 200.00, the level where prices bounced from a month or so back. Select values are below 200.00 for the first time in a long while. Boxed beef cutout values weak to lower on light to moderate demand and heavy offerings. The feeder cattle index has fallen to 144.48, but that is a little more backward looking and with the jump in futures prices, we expect that to level this week. This week’s drop in boxed beef values has reduced positive packer profit margins by at least one-third to one-half according to our sources. Cash cattle trade reported Friday at 124. The sense that feedlots are getting cleaned up and not many market-ready cattle exist behind what is shipping now. The futures curve is starting to reflect that idea as August futures are almost more expensive than the front month May. Getting hedges rolled into August vs May are “cheaper” with this kind of term structure.
Fundamental commentary contributed by John Payne (firstname.lastname@example.org)
Live Cattle: I still feel that the market will make a run at the March highs before the spring beef market has concluded. The market has corrected the oversold condition of last week. The combination of a mildly bullish COF, break of the down trend line on Thursday, and bullish seasonals gives me hope for a bottom being in. The market needs to build this momentum into a 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. Last week, 115 June puts were rolled up to 119 as planned. We will continue rolling June puts up at a slightly more passive ratio if given the chance. We are working ratios between 1:5 and 1:6. With the profits from rolling the 126s down to 115, we can roll up five more times, at an expense no greater than what we started with. Five additional rolls up locks in 20+ additional dollars in the cash. I am not suggesting the market will give us five opportunities to roll up, but I will take every opportunity the market does give us. Moore Research has a seasonal buy for December Live cattle starting April 20th. Here is to hoping we have established a bottom.
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 have relieved the oversold condition of last week. Moore Research has a seasonal buy for August feeder cattle starting April 20th.
May feeders closed above, and then got follow through up and away from the down trend line last Wednesday and Thursday. The down trend line was fairly well established, adding credibility to the break and continuation away from the trend line. The 50 day Moving average sits at about 152.5. Next week’s goal will be to challenge and penetrate through the 50 day Moving average (or the 40 day if you prefer). Technically there is a solid argument that we have established the spring lows, with beef’s best months directly in front of us. At this time the market has not confirmed that, but establishing an up trend line and penetrating top side resistance at 157 would certainly add credibility.
Short term trend is neutral.
Moving averages are still negative, but the 10 day has rolled over and is pointed higher.
Down Side Targets (May)
138.575 is the yearly low established 4/29/2016
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 that 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 put options have been rolled down at least one time, covering the cost of the hedge. The calls leveraged against our May puts over that last couple weeks are now working, offsetting some of the put profit losses. As the math dictated, we did leave 4$ to 6$ of put value on the table. That was a conscientious decision based on not wanting to risk downside protection. As the market works higher, we are adding value on the calls and in the cash, leveraged against losses in Put value.
Currently we are in the hedger’s sweet spot(my opinion) not overly concerned about which way the market moves. We will be utilizing our position to see how the market handles the 157 resistance. If it can punch through we will be looking to roll some of the call profits into August Puts. If it fails, we already have 154 (plus or minus) May puts in place.
May Feeder chart sourced from RJO Vantage 5/6/2016
For more information or to sign up for current updates contact:
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.