The Cattleman’s Advisory 7/29

This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on August 01, 2016.

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Weekly Cattle Commentary 7/29/2016

We would like to congratulated John and his family on welcoming a new baby boy into his family this week.

Fundamental commentary contributed by John Payne (jpayne@danielstrading.com) will continue next week.

As I write this, the best reported cash sales I can find are 115 to 116$. It appears 117$ was offered and rejected by sellers in the North as of late Friday. We will know Monday how that played out over the week end. The week ending July 16th showed carcass weights up 5# over the prior week to 880#, still running below last year’s weights.

August Live Cattle gapped higher Monday in response to the bullish surprise in the Cattle on Feed. Live cattle saw positive action up until late Thursday and Friday. If further weakness can be held in check it would be reasonable to contribute the late week action to position squaring before the week end. As always, we will need to see buyers re-enter the market Monday to validate. 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, is the re-entrenchment of downward pressure.

Our orders to roll the 117 August live cattle puts down to 107s were filled Thursday (7/21). This last week we rolled the 107s back up at a 1:4 ratio, spending 1$ to roll to a 111 August Live strike price.

Feeder Cattle have a little seasonal upside left to them. As of today, Feeders are moving counter seasonal, at least for now. In the CME Group’s Daily Livestock Report it was stated that for the period between June 26th and July 23rd, imports of Mexican feeder cattle into the US is down nearly 50% from the same time period last year. Cheap prices cure cheap prices, eventually.

Technically

August Feeders
August feeders gapped higher out of last week’s Cattle on Feed report. If that gap remains open and viable, it could be considered an initiating gap. Feeders saw bullish follow through until late Thursday and Friday. For now, I am contributing that to week end position squaring. I would consider the down trend line officially penetrated, but we still have not closed above the 50 day moving average. 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. I am now reading commentaries about the glut of meat that will be produced by a potential corn crop of 15 billion bushels.

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 are positive.

Down Side Targets

The yearly low of 134.125

2012 and 2013 lows of 131.5

Topside Targets

The nearest top side resistance sits at 145 and then 148.5. For the first time in quite a while feeders penetrated top side minor resistance at 143.

Hedging Strategy

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 (7/21), working roughly a 1:3 ratio. We are working orders to roll down the 144 puts, but they have not been filled. We will be recommending becoming more aggressive at rolling the 144s down as August moves closer to expiration.

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.

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 7/29/2016

September 2016 Corn chart sourced from RJO Vantage 7/29/2016

August Live chart sourced from RJO Vantage 7/29/2016

For more information or to sign up for current updates contact:

• Donna Hughes (dhughes@danielstrading.com)
• Kirk Donsbach (kdonsbach@danielstrading.com)
• John Payne (jpayne@danielstrading.com)