This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on September 12, 2016.
Weekly Cattle Commentary 9/9/2016
We’re coming into the end of the quarter when you tend to see trends die, hopefully that is the case for the live and feeder cattle markets. From an open interest standpoint, the speculators in feeder cattle have rebuilt their short positions back near recent highs from a few weeks back and are now only a few hundred contracts away from where they were in 2009. The news flow would need to change for the market to rally, I look for the September quarterly reports to help with that. I look for the USDA reports in the grain markets to be bearish feed grains this week, which could help spark the change in trend those in the cattle industry are looking for. Based off the position of the bears on the speculative side, I expect a rebound in prices soon. Do I see the Oct getting back to 120? Probably not, but I think we get a spike close enough to give producers something to think about other than closing their eyes.
Commentary contributed by John Payne.
Cash sales came in at 104 to 106 live and 165 to 170 dressed. That puts cash even to 1.5$ over Friday’s October futures closing price. Basis was holding steady until Friday’s big rally in October Live Cattle. I understand that feeders chose to pass on packer bids late Friday with the Futures rally. The week ending Aug 27th showed carcass weights up 3# at 896#, still 10# below last year’s weights.
Seasonally we are approaching another seasonal low as the cash market generally starts to work higher through the cooler months.
October Live had a major key reversal on the weekly chart with the week setting new yearly lows and then closing above last Fridays low. Major bottoms are often marked by a reversal of some sort, but not all reversals are major bottoms. The weekly reversal does give reason for hope, at least for now. The market did penetrate the supporting trend line, but finished the week back above it. For now, I would consider the psychological 100$ level and supporting trend line to have been defended by the bulls. We need to see higher follow through Monday to build bullish momentum off of Fridays limit up move.
Feeder Cattle have a minor seasonal bottom the first part of October. I have been forecasting lows between 138 and 133 for some time. So far the September contract low is 129.875. If it holds, I will let you be the judge as to whether that was “close enough” to be considered an accurate forecast. It is in horse shoes, and in my opinion, options. That low was set on a day that also marked a reversal for the September contract, that still stands. October and November feeders put in reversals Friday. All that aside, I feel feeders will live or die based on Live cattle. So far October Live has defended the 100$ mark and closed limit up Friday, completing a weekly key reversal. All we need now is bullish momentum, which is the one thing we’ve rarely been able to find, let alone sustain.
As mentioned September feeders had another reversal Tuesday. The Feeder market is extremely “short”, but we need higher follow through this week to scare the shorts. Without that, all other indicators point South.
Short term trend is negative.
Moving averages are negative.
Stochastics gave another buy signal Thursday.
Down Side Targets (September)
The yearly low of 129.875
2011 low (September contract) of 121.375
Downward sloping trend line at 140 (aprox)
The nearest top side resistance sits at 143.375.
We aggressively rolled down Oct puts to 132, most of them close to a 1:2 ratio. In doing so, we gave up a little protection but financed, or came close to financing the October hedge. We will let the 132 puts work from here on, needing at least 1:3 or 1:4 to roll down again. Hopefully the market finds its support and rallies out of here.
Watch for a potential improvement in basis as we near the lower end of the range. If that occurs aggressively sell cash (where practical) and re-own with calls.
For long hedges we recommended placing orders above Mondays high (8/29 – 133.1 Nov) to buy Nov out of the money calls. Tuesday (8/30) our trigger was hit and I hedged a future bred heifer purchase with 138 Nov calls for 2.7$. With hindsight as our guide, that was obviously a little early. On 9/6 we added 1$ of hedge expense and rolled the 138 calls down to 134 calls. I am willing to roll them down again if given the chance, but I probably would be more passive, looking for 1:5 or 1:6. Options are not about being perfect. They are about being close. Hopefully I am within one or two rolls down of being correct.
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.
September Feeder chart sourced from RJO Vantage 9/9/2016
September 2016 Corn chart sourced from RJO Vantage 9/11/2016
October Live chart sourced from RJO Vantage 9/9/2016
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