The Cattleman’s Advisory 01/27

This is a sample entry from Kirk Donsbach’s newsletter, The Cattleman’s Advisory, published on January 30, 2017.

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Weekly Cattle Commentary 01/27/2017

Cash sales closed the week mostly 122$ in Texas and 194$ dressed in the North. That is after the Fed Exchange topped at 124 on Wednesday. Basis appears to be 4$ over February futures. Lower cutout and higher cash has squeezed packer margins into the red. Reports are that the Packers have reduced hours to slow the decline in box prices and pressure cash prices.

The week ending January 14th showed steer carcass weights declining 7# versus the prior week to 898#.

This week had two bearish news events. First, President Trump announced a possible 20% tariff on imported Mexican products. It is feared that any retaliation would involve agricultural products.
The other news, although not accounted for in the market yet, was a surprise in the Cattle on Feed. Placements, with no estimates coming in over 113.6%, were reported at 118%; Cattle on feed 100%; Marketed 107%. On feed .9% higher than the average estimate and Marketed .3% higher than the average.
My concern is that the newly profitable producer has been heavily shorting this market, especially after June hit 109. Managed money has been one of the big buyers, now accumulating a very large 109K long positions. IF the trade concerns, and now a bearish placement number turns them into sellers, who is going to be the buyer, and how big of a whole do they punch in the market trying to get out?

Of course, another commentary I read is calling for March feeders to find support at 123, a mere 4$ lower. Guess it depends how the funds react Monday morning.

Right now, it appears retailers are maintaining good margins, with processing margins negative. Fed cattle are showing profit margins over 100$ a head.

February Live corrected marginally lower all week, contradicting bullish cash news and an severe weather event. There are several indicators, both fundamental and technical, that are warning of a nearing top, but for now the chart is still pointed higher. IF we gap lower and close below the major up trend line at 115.50, that will be about as strong of a sell signal as one can get. It will take a nearly limit down move to accomplish that Monday.

Feeder Cattle will likely follow Live’s lead, only at an accelerated pace if it is lower Monday.

March Feeders also had a corrective week, in the face of very bullish Live cash news. You will notice that March feeders did stay supported above the up trendline and the 50 day moving average, but now sits right on top of those levels. IF Monday gaps through these levels, and closes at the bottom end of the days’ range, any hopes for 137 in the near term must be set aside. It appears the million dollar question, “do you wait for 137?” was answered with a “no”. Higher prices brought a lot of calves to town in December. The most since 2005.

Short term trend for March feeders is bullish, but by the slimmest of margins.

Moving averages are bullish with the 10 day starting to roll back negative.

Stochastics gave a sell signal 1/24.

Down Side Targets (March)

Up trend line around 126.10

Major support at 122.92

Topside Targets

Major resistance at 137

Hedging Strategy

Most of our clientele left Jan puts expiring worthless and moved to March 127 puts. We also rolled some 120 and 122 March puts up at 1:5 or 1:6 ratios. The last of them was done Wednesday as feeder futures slipped in the face of a 124 Fed Exchange cash highs. The last January holdouts rolled to March 125 puts as our 128.65 level was penetrated. On average, we have a concerning 6 or 7$ into the hedge, but after the COF that doesn’t seem to be near as concerning as it was.

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. Our next move was going to be out to June, either at higher money or when the 118 Feb puts could cash flow the move. Depending on Mondays action, we may decide to hold the 118s a bit longer, or even let them turn into short futures with an accompanying buy stop, if they are deep enough in the money by expiration.

Mondays action and close could be very telling.

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

March Feeder chart sourced from RJO Vantage 1/27/2017

March Corn chart sourced from RJO Vantage 1/29/2017

February Live chart sourced from RJO Vantage 1/27/2017

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)