The Cattleman’s Advisory 01/13

This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on January 16, 2017.

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Weekly Cattle Commentary 01/13/2017

Cash sales hit 119/120 on Wednesday and closed the week 118$ to 119, and 190$ dressed. Basis appears to be even with February futures. Beef demand has been excellent, but showing a post holiday decline in the cutout of 12$ on the week. Lower cutout and higher cash has squeezed packer margins with some talk of decreasing kills.

The week ending Dec 31st showed steer carcass weights 3# higher than the prior week at 900#, just above last year’s weights. Weather reports are showing an ice storm over the plains this weekend. It has been reported that cattle movements will be harmed in Texas, Oklahoma, Kansas, Nebraska, and Missouri.

The rising dollar and interest rates are concerning, although the dollar seems to be consolidating at the moment. January usually shifts beef demand away from ribs and loins, with chucks and grounds gaining. Often supplied by the heavy run of fall cows.

Hogs still holding steady since the bearish pig report.

Right now, it appears retailers are maintaining good margins, with processing margins slipping. For the first time in a while, many Fed cattle are also showing good margins.

February Live cancelled the last major reversal, and set new highs for the move at 119.70. There are several indicators, both fundamental and technical, that are warning of a nearing top, but for now the chart is pointed higher. I would recommend buying puts and hoping for a major break out higher. Weather is the wild card.

Feeder Cattle will likely follow Live’s lead, but I am concerned that they are lagging Live Cattle’s very impressive rally.

March Feeders also cancelled the last reversal signal and set a new high for the move at 130.95. It is important to note that the January / March spread has narrowed from almost 6$ to 1.15$. For those using January to hedge further out months, that is very positive. The caution signs increase almost daily, but for now we appear on track for 137. If we get there, I cannot come up with one good reason not to hedge that level, and hope we see 150 or higher. The million dollar question is, do you wait for 137?

Short term trend for March feeders is bullish.

Moving averages are bullish.

Stochastics gave a buy signal 1/9.

Down Side Targets (March)

First support at 125.50

Up trend line around 124

Topside Targets

Nearest resistance and major down trend line at 130.95

Major resistance at 137

Hedging Strategy

At 126 January feeder’s we initiated January puts for individuals that will be selling cattle the first of the year. These clients should be making cash sales and exiting the hedge shortly, at pretty good cash prices.

For those selling next spring or later, our January puts have pretty much run their course. Last Friday’s action had March up $1.55, with January only trading up $.12. As long as March is rallying we can let it run. If March turns lower, I am very concerned that our January puts will not perform like we need them to. IF March drops below first support at 122.50 we need to move to March. I am recommending March as the normal seasonal decline should not last much beyond the end of March. We have sent out recommendations on where it makes business sense to roll to march if we continue higher.

Spring sales of Live cattle were 100% hedged with about 40% of total cash sales at Feb 106 puts, and the rest with Feb 110 puts or higher. We rolled the 106 to 110 and then all of them twice more, with the last cumulating on 1/11. The net result is we added 3$ of expense to the 106 puts, and 2$ to the 110 puts, but now sit with 118 February puts. I am very concerned with the decline in boxes and the packers profit margin slipping to negative. We will continue to recommend rolling them at a 1:4 ratio if the market allows us the opportunity. We will also be watching the Feb/June spread for an opportunity to move to June (if needed).

Contact one of the Daniels Trading brokers below for more trading ideas.

March Feeder chart sourced from RJO Vantage 1/13/2017

March Corn chart sourced from RJO Vantage 1/16/2017

February Live chart sourced from RJO Vantage 1/13/2017

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)