Where Cattle Prices Are Headed
Sep 23, 2010
I have had a lot of questions as of late about the cattle market. As in the grains there are really two sides to this story, the actual fundamental supply and demand picture and the way this damn thing trades on the board.
Fundamentally I have heard that the packer margins have fallen negative and has already or will quickly reduce the number of kills scheduled. Demand on the other hand still continues to remain intact. With this in mind you have to believe the production cutbacks, along with the price action on the board will ultimately pull down the cash price, this though should help build a nice floor under the beef market. Now if demand starts to waiver all bets are off and we could drop out of bed. I don’t foresee that happening, but I have traded long enough to know anything is possible.
I think the longer term picture still remains bullish. We have a small herd and good demand. Corn prices may deter some expansion programs initially but longer term demand should more than outweigh and justify any additional input costs.
The second part of the equation is a little trickier to explain. As we sit, the "large-spec" traders currently hold a new record number of net long positions in this market (slightly over 133,000 contracts). That means almost 90% of all reportable spec traders in this market are long cattle. You don't have to be a rocket scientist to understand that if all of these traders start to head for the exit door at the same time there will be a huge amount of sell orders flood the pit. This scenario would drastically rock prices as the market tries to adjust. In addition, with this many already net long, you have to wonder how many new buyers are going to be stepping in at these price levels. Of those currently long you have to also wonder how many will be willing to buy more as we move higher and how many will actually be sellers looking to offset their long positions and take profits as we move higher.
I certainly want to get long this market, but with the prospect of massive long liquidation still looming I can only comfortably recommend being patient. I continue to think we may see an opportunity as prices fall back to levels that are not justified by the existing supply and demand picture. I am going to continue playing the $95-$100 range in the fats. Aggressive traders can sell both calls and puts outside of these limits. Those wanting to trade the outright futures might want to take a scaled approach and look to add long positions on breaks below $96.50 which is right around the 100-day moving average. I personally will be looking to establish longer term bullish positions at $97, $96, $94, $92 & $90 levels if we happen to see panic type selling from the longs.
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