Weekly Cattle Commentary 8/11/2017
This week’s cash prices saw the bulk of cattle trading 114.50 to 116, 2 to 3$ lower than last week’s trades. Dressed sales were 183 to 185$. Basis was 5$ over the August Live board. Estimated weekly slaughter was 641K head, 62K larger than the same week last year. Box prices in the PM report where 199.60 choice, and 196.12 select with a 3.48$ spread. Interestingly, choice saw sub 200 for the first time since February while the packers had the largest kill of the year.
The week ending July 29th showed steer carcass weights up 12# versus the prior week at 878#, 8 pounds under last year. The USDA has that above the 5 year average.
Weekly beef export sales were 16400 MT for the week ending Aug 3rd. Up 44% from the prior week and 31% from the 4 week average.
We clearly have a slug of cattle to work through this fall, and the Live cattle chart read isn’t very good. However, before you get to crazy bearish you should consider, we killed 62K more cattle this week than this week last year with cash prices just marginally less than last year, same time. The large kills have been consistently increasing for several weeks now. That is an indication of the profitability of the Packer and Retailer. Beef export sales have also responded positively each time prices have declined. The July COF indicated an increase of 465K head. I feel it is reasonable to assume (hope??) that at least 150K to 200K of these where early placements out of the drought areas (see Cattleman’s 7/21-note Allendale disagrees with me). The week of the last COF we killed 622K, 25K more than previous year, at a price of 1.20$. Following week, 627K, 47K more, at a price of 117. Third week, 634K, 51K more, at a price of 117/118. This week, 641K, 62K more, at a price of 115. In the three weeks following the COF we have killed 160K more cattle than last year while only giving up 5$ in price. Clearly, we have a lot of cattle and demand is very good.
The most bearish factor, at the moment, is that open interest is clearly declining as the funds liquidate long positions. The worst part is we still have a long way to go if we are to fall to the 10 year average. The flip side is, seasonally open interest starts increasing the middle of August.
What does all that mean? While we could have some more downside ahead of us, I would not get hyper bearish expecting a repeat collapse of last year. Feedlots are just too nervous about the market (and the basis is to strong) and are staying current, as indicated by the carcass weights.
August Live looks definitively weak. It clearly took out the up trend line this week. You will notice however, it found support at the 200 Day MA. The 5 year historical pattern for August, which we seem to be most closely following, shows weakness through the 26th of August. The October chart is similar with strength starting the 27th of August through the middle of September.
Feeder Cattle; The basis for fall delivery calves has been surprisingly strong, with 700 lb MT calves being bid 5$ over the October feeder board. That is very strong for this time of year, and indicative of a belief that this market is generally supported. I think any immediate fears of high priced feed where subdued with the last WASDE report, and corresponding market reaction. The CME feeder cattle index is at 145.96, down about 5$ week over week. The index is about 4$ over August Feeder futures.
August Feeders look weak, but not broken. The 100 Day MA failed last week, but August feeders found support at the up trend line. Technically feeders remain in an up trend, with a three month corrective channel, supported around 140..so far.
Seasonals show weakness through the 26th of August, and then strength up to the 3rd week of September.
Short term trend for August feeders is Neutral to mildly bearish.
Moving averages are mildly bearish.
Stochastics are deep into a sell signal.
Down Side Targets (Aug feeders)
Major support and Major up Trend line at 140
First resistance at 150
The increasing value of the deep in the money August 149, 147, and 146 puts was either protected with long futures or used to finance further out hedges this week. Value protected with long futures will be used to buy differed options at a later date, and hopefully higher price, with buy alarms set under the market. The 143 August puts are on deck if we get further weakness this week.
Short of a miracle, my August calls are going to expire worthless. Although I am disappointed I was not able to capture any additional capital, I am very glad I sold the calves when I did. If we get enough of a rally to finance a move into September I will do that, otherwise my 2017 cattle marketing has concluded and I will start looking to protect the 2018 crop if we get higher prices.
IF you have short futures hedges on 2018 cash sales, now deep in the money, I would recommend to start preparing to place calls against them, exact timing can be discussed.
I would also recommend buying calls to hedge future purchases not yet made this year. IF we collapse like last year, you won’t mind losing a little call premium and buying replacement inventory at a considerably reduced price. IF we rally, the call profit will offset some of the increase in price, improving your breakeven. The large basis is also supportive to buying calls and waiting for the basis to move back to a more “normal”. That is also why producers should sell the calves, locking in the strong basis, and buy calls to hope for more.
Aug Feeder chart sourced from WebOE 8/11/2017
September Corn chart sourced from WebOE 8/13/2017
August Live chart sourced from WebOE 8/11/2017
For more information or to sign up for current updates contact:
Donna Hughes (email@example.com)
Kirk Donsbach (firstname.lastname@example.org)
Livestock Futures and Options to Hedging
If you are interested in the livestock commodity futures industry but feel you could use more information to get started, then download this self-study guide to learn the fundamentals of futures trading and hedging. You will receive an incredibly detailed, step-by-step explanation of the life of a livestock futures contract, as well as what tools you will need to possibly realize your goals.
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.