This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on Monday July 18, 2016.
Weekly Cattle Commentary 7/15/2016
Cattle markets look to open the week a little higher as the feed markets trade lower into the morning session. The sideways gyrations of the cattle markets within a 10 dollar range are causing the trend follower’s fits. With a spec position near zero, I look for cattle price breaks to hold. Box beef cutout was up 205.37 on Friday down almost 28.00 from a year ago. According to Drovers, cattle feeders continue to find small margins despite a year over year decline in fat cattle prices. A month ago cattle feeders were earning $32 per head, while a year ago losses were calculated at $11 per head, according to Sterling Marketing. Feeder cattle represent 72% of the cost of finishing a steer, compared to 77% last year. All of this spells poor news for those like me who are betting on a rebound in the feeder cattle price in the short run. The good news, per COT report on Friday is that much of this is baked in and speculators have a lot of potential to push the market if given the chance.
Fundamental commentary contributed by John Payne (email@example.com)
Live Cattle: Beefs best demand seasonally is now complete. Cash prices appeared to hold at 117$ late Friday, after falling to as low as 115$ late Monday. Basis has been between positive 7$ and positive 10$, but that’s relative to the August Live cattle board which was discount to the June board. Carcass weights for the week ending July 2 increased by 4# to 868#, 7# under the same time last year.
August Live Cattle: Contracts established new lows on 7/12 (again). Buyers quickly re-entered the market Wednesday and Thursday pushing the market 4.5$ higher, but again the long specs were not confident enough to ride the week end out and sold off 1.80 to close at 110.925 on Friday. It’s worth noting Live cattle establish yearly lows in July 22% of the time. Granted, that means it is possible, but not highly likely. A challenge of the upper trend line around 117 is still technically reasonable, but equally likely and probably more so given the dominant down trend and bearish seasonals, is the re-entrenchment of downward pressure. Technically Live Cattle has STILL not produced a strong bottom signal and Monday and Tuesday’s new yearly lows leave the 6/21 to 6/30 rally looking very much like a 3 wave correction higher, followed by more downward selling pressure.
So where does all that leave us? I recommend falling back to what we know. We know a plus $8 basis is historically good and Futures are indecisive at best to shaky at worst. I recommend locking in this basis if possible by forward contracting or selling 2016 production where practical. I would restructure my risk portfolio out of the cash market (actual cattle) and into long August Live cattle calls.
We have been informed that, at least in some areas, packers are only offering a plus 2$ basis for late August cattle. Given that information, we instructed those clients to leverage the protection offered from their pre-existing in the money puts and wait. We will be trying to roll 117 August puts down at about a 1:3.5 ratio if the market allows.
Feeder Cattle have a little seasonal upside left to them (First part of August, but in my opinion less reliable after the 4th of July). That’s relative to time, not necessarily to price. As of today, Feeders are moving counter seasonal, at least for now.
I am including the September corn chart in today’s newsletter. You will notice the small feeder rally and corn’s selloff seems to be directly connected, almost to the day. I don’t know how much more downside corn has, but it is highly likely we are closer to a bottom than a top. Given last week’s action in corn, I personally feel corn will see more downside before it sets a bottom. I believe Mr. Payne would not agree with me, and you should know he is much more versed in the grains than myself.
August Feeders: August feeders established a new yearly low on 6/20 at 134.25. By Wednesday (7/6) they had rallied to a high of 146.1. They did penetrate the down trend line, but were not been able to close above it. That also applies to the ever capping 50 day moving average. Monday saw a failure of the uptrend line and significant selling pressure through Tuesday. This may be important, feeder cattle DID NOT establish a new yearly low with corn rallying and Live cattle setting new yearly lows. If Live cattle can maintain neutral to mildly bullish momentum, with a potential additional leg down in corn, feeders just might push through the 50 day and the down trend line to see 148. I recommend “hoping” for 148 August feeders with call options and not your 2016 production.
As with live cattle, I do not see the telltale technical signs of a major bottom in feeders. A short term bottom that gets us through the rest of the summer (July and part of August) would not be a surprise. I would aggressively forward contract 2016 production on any rally before the 10th of August, and look to re-own with calls. As in Live Cattle, I strongly recommend restructuring risk out of the cash market and into feeder call options.
Short term trend Neutral. Overall major trend is very Negative.
Moving averages are Negative.
Stochastics are giving a sell signal.
Down Side Targets
The yearly low of 134.25
2012 and 2013 lows of 131.5
Top side of the wedge we broke down and out of presently sits around 142.75(red descending diagonal line)
The nearest top side resistance sits at 145 and then 148.5. Once again feeders have added an additional layer of resistance.
In the Money May hedges were exercised at expiration on May 26
We recommended purchasing August puts on a downside breakout of a minor wedge (in orange on the chart). Unfortunately, we gapped out of that wedge and our fill was not as good as one would hope. I ended up buying 141 August puts for 5$ on the open Monday (5/23). On 5/31 we rolled 141 puts up to 144 puts, utilizing the aggressive 1:3 ratio mentioned in this letter. In June Superior Video had Montana’s first big auction sale for fall delivery calves. The cash basis was much weaker than I was expecting or hoping for, coming in at about plus 4$ to $6 on a 625lb calf. I begrudgingly accepted that as an established fact, and forward contracted ¾ of my 2016 production after the video auction. Basis for a 625# calf seems to be holding between even and plus 4$. I forward contracted the remaining ¼ of my 2016 production early Monday after the market penetrated the down trend line. For clients not forward contracted, I would continue to leverage the protection offered from the 144 puts. We will be working the math on rolling the 144s up or down as we progress forward.
I re-owned most of my 2016 sold production with 141 calls. With August futures at 145, even though it was one of my topside targets, the math simply did not make sense and I was forced to risk the calls to at least 148. Clearly the probability of seeing 148 is less likely than it was last Friday. However, anything can happen and the math and the logic behind owning the calls has not changed. I continue to “stay in the game” by owning 141 August Feeder calls.
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. For Fall delivery calves, it is time to transfer down side risk out of the cash markets and into fixed risk long calls.
August 2016 Feeder chart sourced from RJO Vantage 7/15/2016
September 2016 Corn chart sourced from RJO Vantage 7/15/2016
August Live chart sourced from RJO Vantage 7/15/2016
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