How to Play the Cattle Market
Apr 21, 2010
I realize we have had one heck of a move higher, I’m just not convinced that it has topped out just yet; Sure, I think it will happen eventually happen, but when?
The Packers seem to have really good margins right now, I am hearing that cattle prices at $99, or even $100, will pencil for these guys right now. Feeders are also helping by pulling cattle forward to try and catch the high cash market before it fads away.
Last week’s fed cattle slaughter was just above 500,000, it was a nice jump higher from the previous week, and from what I am hearing we are going to continue higher through Memorial Day topping out between 550,000 and 570,000. You have to think this much added production will eventually force prices lower.
With the thought of lower beef and cash cattle prices I believe coming our direction, and the increase in spring placements, I am just itching to get short the August futures. I am just still a little apprehensive. No one seems to have a real handle on the export numbers, I am not so sure we won't see a significant pick-up as their economies continue to improve. If we see heavy demand continue in exports for chuck, round, and trimmings prices then we can forget seeing cutout values and cattle prices dropping anytime soon. The other big thing that is making me a little nervous is that we don't seem overvalued at all right here. Buying still seems strong, everyone is comfortable and still able to turn good margins.
I know for sure we are going to see a drop off in demand once we get out into June and July, I am just not sure how much it will effect our overall prices though. Some of the big traders are talking as if the cash market might stay above $90 for a long time. In fact many of big boys are thinking that this might be when the cattle market re-defines it's boundaries preparing for the increasing global demand that is heading our direction....you certainly can not rule it out
Do I believe we are going to see lower prices? Yes
Would I exit my long positions and take profits? Yes
Would I hedge some more cattle at these price levels? Yes
How far do I think prices will break and when? Unfortunately that is the magic question.
Right now there just doesn't seem to be a lot of room left to the upside, and I am not sure there will be a major break lower when prices do start to fall.
With the volatility and price action high like this, you may want to consider selling out of the money calls and out of the money puts. This gives us a way to capture nice returns when the market looks to be trapped at the high end of a trading range.
If you need any more information please don't hesitate to call or e-mail.
Kevin Van Trump