This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on Monday July 25, 2016.
Weekly Cattle Commentary 7/22/2016
Beefs best demand seasonally is now complete. Cash prices weakened last week trading in a range from 114 to 116, with most trading at $115 midweek. That cash price establishes a new low for the year, and a new 4 year low. Basis held between positive 6$ and positive 8$. The positive basis is encouraging good volume, maintaining about 600,000 a week. That, along with the latest heat wave, should keep feeders current and carcass weights trending under last year.
August Live Cattle contracts sold off all week and established new yearly lows on Thursday (7/21). It’s likely that Fridays positive action was initiated by profitable shorts exiting the market before the weekend and the release of the Cattle on Feed. I view the Cattle of Feed to be mildly bullish to deferred Live Cattle. It will be interesting to see if Fridays normal position squaring can turn into the start of something fundamentally positive, initiated by a surprise in the placement numbers. Again, Live cattle establish yearly lows in July only 22% of the time. 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.
Our orders to roll the 117 August live cattle puts down at roughly 1:3 were filled Thursday.
A plus $6 basis is historically good and Futures are indecisive at best to shaky at worst. I recommend locking in this basis if possible by forward contracting or selling 2016 production where practical. I would restructure my risk portfolio out of the cash market (actual cattle) and into long August Live cattle calls.
Feeder Cattle have a little seasonal upside left to them (First part of August, but in my opinion less reliable after the 4th of July). That’s relative to time, not necessarily to price. As of today, Feeders are moving counter seasonal, at least for now.
I am including the September corn chart in today’s newsletter. You will notice the small feeder rally (6/20 to 7/6) and corn’s selloff seemed to be directly connected, almost to the day. Then the markets focus seemed to shift to a cheaper corn produces more beef perspective. As stated last week, for any kind of real rally in feeders we need Live Cattle to at least maintain.
Fundamental commentary contributed by John Payne (email@example.com)
August feeders sold off all week and established a new yearly low on 7/21 by .125$ at 134.125. The deferred months were more aggressive at establishing their new lows. Technically, everything is pointed lower. Except for one thing, how low we already are. IF the Cattle on Feed is interpreted by the market as bullish to deferred live, one could hope for pass through to feeder cattle. For feeders to have any hope at all we need Live cattle to maintain neutral to mildly bullish momentum. Irrational as it seems, that may also mean corn finding a bottom. To clarify, for corn to quite selling off. A huge rally in corn would not be constructive for feeders.
I recommend “hoping” for 148 August feeders with call options and not your 2016 production.
I strongly recommend restructuring risk out of the cash market and into feeder call options.
Short term trend is Negative.
Moving averages are Negative.
Stochastics gave a buy signal last week.
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 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 on 7/11 after the market penetrated the down trend line.
We were able to roll 145 August puts down Thursday, working roughly a 1:3 ratio. We are working orders to roll down the 144 puts, but they have not been filled.
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. 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. I placed an order to roll the 141 calls down at a 1:5 ratio if given the chance. This is based on a belief in our system more than anything, and 1:5 is very passive.
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.
August 2016 Feeder chart sourced from RJO Vantage 7/22/2016
September 2016 Corn chart sourced from RJO Vantage 7/22/2016
August Live chart sourced from RJO Vantage 7/22/2016
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