Farm Progress

Live cattle could lead the way higher now

I believe packers won the poker game to buy another round of cattle at lower prices, but supplies and basis appear improving.

Chris Swift 1, Blogger

October 5, 2016

2 Min Read

 

Although minuscule, the early formation of waves higher appears to be unfolding in 5 waves instead of 3 on the live cattle charts.

With fats leading the way and the October contract out front, I anticipate fed cattle to move significantly off the most recent contract low.

I get the feeling I will be justified in my analysis of a couple of weeks ago when commenting on the packer needing cattle and doing everything in their power to keep from having to bid them up. The packers ploy to prolong purchases worked. It appears their poker hand was a bluff and caused producers to fold, enabling them to buy cattle cheaper for at least one more time in this decline.

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I anticipate a significant portion of cattle now under contract, captive supply or through the vertical integration chain are spoken for, there are fewer animals for sale to draw from. Therefore, the packer may need to come to the "open market" to secure the remainder of their kill needs. These cattle may not be of the quality needed, or potentially in shorter supply as well, and therefore causing the packer to go bid for inventory.

Recall they have no advantage any more without the positive basis to rely on to buy cattle cheaper in the futures. 

Feeders are soft this morning. This is not unexpected because the situation is perceived in the fat market. I anticipate this to continue with the fat market lending a hand to the feeders to help pull them up.

A great deal has changed in the fat market and the closed basis and inversion of spreads between contract months confirm this. These changes may bleed over into the feeders. If so, then purveyors may want to consider solidifying the positive basis through the ownership of call options.

 An investment in futures contracts is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources and other relevant circumstances. Past performance is not necessarily indicative of future results.

About the Author

Chris Swift 1

Blogger

Chris Swift is a broker and advisor in Nashville, Tennessee, offering technical and mechanical analysis of the commodity market to help people improve their risk management.

To contact Swift about hedging or to subscribe to his daily market comments at:

shootinthebull.com/commodity-market-comments/

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