In my opinion, if it weren't for bad luck, we'd have no luck at all. The tiny amount of optimism produced by futures traders this week was dashed as another, out of the blue situation, materialized. Stress exposes weakness and the cattle market was already weak before the fire or Friday's escalation of the US/China trade war. These issues did not start, or will they terminate, the issue of disparity between packing capacity and cattle production. Packing capacity versus production is the weak link and has been the leverage packers have enjoyed due to greater production and lesser packing capacity. Now, I know some just screamed, "hold on now", we just saw the packer rise to the occasion to keep kills elevated, without the Tyson plant. You are correct, but none of this issue changed consumer demand. Consumer demand is perceived as excellent and under these conditions, cattle prices still did not rise. If economic issues begin to impact consumer discretionary spending habits, the excellent demand, that did not cause a rally in cattle, could go to good demand and cattle prices could continue to decline. The past two weeks of trading have been more about money than cattle. Participants are not buying or selling cattle in a manner that creates a hedge, or disperses/purveys inventory. They are attempting to gain profits or cut losses due to inordinate price width fluctuation.
The lower trade on Friday wiped out most of the gains made through the week. This week’s price action is deemed as a wave 4 correction with a wave 5 new contract low anticipated. To what extent, I do not know at this time. A trade to a new contract low will help to complete the wave count on the weekly continuation chart. Having written this without the knowledge of the on feed report, I'd say that were placements to be even with last year, the December contract could fare pretty well. It's the premiums in the February and April contracts that have my attention. With it believed there will be elevated inventory of feeder cattle to be placed this fall, how quickly or not they go into yards will help with the answer to these months. Even with the premium these months carry, they are still right at contract lows and are in a bear market.
Previous recommendations this spring have produced windfall hedges for some. With the price action becoming more and more volatile, many have seen how fast money can be given and taken away. Some questioned this week whether taking profits on hedges, while inventory remained unpriced, would be wise. I stated unequivocally that lifting hedges would be a mistake. That is because we do not hedge for the things we can see. Everyone can see the same thing. We hedge due to factors we attempt to foresee, as well as those factors that no one can see, like the fire and Friday's Trump tweet. The October contract of feeders pushed from the contract low close on the first day up to $133.00 in the first 30 minutes of trade. It then went on to make a $136.57 high the next day. The correction from that $136.57 high was down to $132.42. After that low, traders spent the next 4 trading days creating a sideways triangle. On Friday, that triangle was broken to the downside and both the $133.00 level and $132.42 level were exceeded. This leads me to anticipate the down trend to resume.
I know many are chomping at the bit to find a bottom in feeder cattle. There remains a fundamental factor of pushing a believed elevated number of feeders off pasture and into a precondition lot or feedyard over the next 60 to 90 days. These backgrounders are marketing to a sector of the industry perceived as bleeding out, with elevated numbers to market. This is a factor we can all see. Previously we attempted to foresee it, and hedged accordingly. Now, instances of the fire and Trump tweets have exaggerated the market action for which we had no idea these factors would materialize. The index is anticipated to decline further as these factors help mold the bid/offer at the next sale. As the index absorbs the information, I will be looking for the futures to over exaggerate the decline and push basis significantly positive in which feedyard's can hedge future purchases. At present, continue to hold hedges and anticipate a new contract low.
Corn is quickly becoming my second Achille's heel for the year. Hogs were the first. USDA remains adamant that the corn crop is out there and good. Private forecasters disagree. There is no doubt I remain wrong on corns price direction at this time. However, like the cattle, we can all see that. The reason I remain hedged corn, is that livestock producers need corn. To accept the current unrealized loss, in order to cut losses, exposes you to two factors. One, a loss in which you are no longer in the market to regain, and two, you are now susceptible to a price rise that could be worse than the price decline. The crop remains well behind years past and remains still in the field. I prefer to hold positions until it is in the bin and usable.
Christopher B. Swift is a commodity broker and consultant with Swift Trading Company in Nashville, TN. Mr. Swift authors the daily commentaries "mid day cattle comment" and "Shootin' the Bull" commentary found on his website @ www.shootinthebull.com
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