"Shootin' The Bull" Weekly Analysis...
For the week ending April 5, 2019
In my opinion, hyper volatility has set in on the live and feeder cattle markets. From March 12th to today on the daily charts, and Thursday and Friday's of this week’s movement, traders and participants have not had a minutes rest. I tend to equate volatility with significant indecision. That indecision is not difficult to see. Many believe that this year’s pricing will follow the past two years in which significant declines have been seen. On the flip side, outside of the industry participation has been exceptionally strong. So, between producers and purveyors looking at one thing and the funds looking at another, it is easier to see why the volatility is so high. Now, slowing of the volatility will suggest that one side is tending to be more correct than the other and one should then anticipate a trend to start to develop. Since fat cattle have been in an upward trend for months now, I anticipate the trend to the upside to resume. My analysis leads me to believe that whether by intention or circumstance, there will be fewer cattle placed on feed this year. That does not mean there won't be more cattle to be placed on feed, just that they won't place them on feed. Just a simple 10% decline in feeding capacity could turn the on feed numbers down sharply and create a higher fat market and lower feeder market.
I think it important to watch the spreads between starting feeder month and finishing fat month. Those spreads have been wide for several years. As the feed yard sector of the industry has seemingly bared the burden of risk by feeding cattle to meet demand, just a simple adjustment could turn P&L's back into the black. Were this to be an intent objective of the feed yard, it would keep more cattle outside of feedyard's and potentially less tonnage to the packer for quite some time. The tonnage could easily fluctuate with more or less feeding time. However, the lack of a home for a feeders sized steer that you no longer want could become taxing.
On Wednesday of this week, I recommended buying the October live cattle at the market with a sell stop to exit only at $115.00. ***This was a sales solicitation.*** I looked at the October chart from the perspective of an old commodity book I have titled "How to Make Money in Commodities", by Dr. Bruce Gould. His approach is one I have kept in my tool bag ever since I received the book. The principle behind his method is simple. He denotes that when markets find themselves trading in a narrow price range for some extended time, it reflects and equalization between supply and demand. Were that equalization to be upset, then prices would move out of the range, either higher or lower. Traders were able to keep October fats in a $3.77 range from 9/4/18 to 1/8/19.
For the first time since creation of the range, someone, somewhere, felt the need to pay a higher price than anyone else in the past 4 months. Prices fell back into the range and came out again to the upside in February and stayed outside the range for two weeks before once again dipping back into it. Note that the breakouts are coming to the upside. Then, from the bottom of the 3/12 low, traders pushed October out of the range by a significant amount. This week, traders tried very hard to push prices once again back into the sideways range and appeared to have failed returning to inside the range. With the front months still in an upward trending pattern, it leads me to believe that upon completion of this hyper volatility, a trend will begin to form in the October contract to the upside.
As stated last week, hope is a poor tool to use in the bag of tricks. I dislike it working because it tends to cement poor habits. It did work this week though and allowed for some pricing action in the feeder market. I want to be clear that I am not basing my recommendations to market feeder cattle inventory based upon price direction. It is based upon the convergence of basis in which at this time is extremely wide. Keep that in mind as you are deciphering my analysis. Although there are multiple variations to what can happen in the interim, the basis will converge from either the index moving higher, based upon cash sales, or the futures will decline to meet the index, in which cash prices have not moved higher. Although basis may vary in your specific location, due to a belief that all ships rise and fall with the tide, cattle in your area will be as closely related to the feeder cattle index as ever has been. If your location is always $8.00 back of the index and the index rises $4.00, then the cattle in your area will have been anticipated to have risen a like amount. Again, I know that this is not exact. Basis is a key factor in helping to gauge demand. Basis tightens up, somebody wants them. Basis widens out, nobody wants them.
There are now two variables in feeders that I believe are in play at this time. One is the obvious health, mud, and death loss issues in the north. The other is not so obvious of the objectives, or not, of the feed yards. I am having to use varying items and taking some liberties as to the credibility of my analysis on this. I am using the 4 of the past 5 months lower placements, after 2&1/2 years of hefty and double digit placements, as one clue. I believe that whether or not the feedyard's do actually have a plan in place, or the weather was a major factor in fewer cattle placed, there will be fewer cattle placed this year. I do not know how to gauge which factor is going to be the price driver. Therefore, focus on what is available to you and that is an exceptionally wide negative basis.
Grains remained soft all week. I do not anticipate any resolve in the tariff issues. If there are, then I will be pleasantly surprised. Corn continues to languish at the low end of the price range. Planting will be late in some areas, but most likely all that is missing at this time is prep work. Beans are anticipated to trade lower for reasons of potential increased acres from corn and no resolve in the tariff issue. Wheat is the questionable market at this weeks end. As much as I like the looks of wheat, there is overbearing factor of the oscillator and price having set the lows with no divergence. Therefore, I am starting to anticipate a new contract low in wheat. The KC/Chicago spread has been relentless and KC is on the verge of setting a new contract low. So, at this time, I do not find any favor in wheat.
Bonds softened this week after having traded higher last week in reaction to the dovish stance now taken by the Fed. I think this is just a wave 4 correction with a wave 5 to a new high. Equities continue to firm, but at this price level, buying power is diluted greatly. Potentially, even if there were no aspects for a bear market or recession/depression, the price range created from 9/21/18 to present could be traversed a number of times before new historical highs are made again. At this time, the price just happens to be at the top end of the range than bottom.