The futures remind me of the flu I suffered with for nearly two weeks. I knew I would get better, but darned if it wasn't miserable in the interim.
Futures have a bad case of the pessimism, a sickness that needs tremendous proof to resolve ... apparently a lot more than what has already been provided over the past four months.
Nonetheless, again Tuesday morning the futures were lower in disbelief that the cash market can sustain the current levels, much less continue to improve. They closed lower on the day. However, that is where we are and dealing with this has become a psychological nightmare.
Were producers not so weakened financially, I would perceive this current environment to have never existed. They are, however, and that makes this environment ripe for antics to be played by packers.
More often than not, I perceive when one attempts to manipulate a situation, it is to better their own position. In the bear market environment, packers had no desire to own cattle out front as the price was declining. This was a move to reduce price risk exposure. They allowed someone else to assume the risk of lower price fluctuation (feeders).
Tuesday, the packer was bidding for inventory out front. This is taking on the assumption of risk. Were the packer under the impression that cattle prices will be lower in the future, they would allow the yards to assume the risk. That does not appear to be the case.
I cannot answer the question of why to this inordinate basis spread. Especially in the more distant months. I continue to tell myself this is a year of transition. Through the transition, pessimism may still be greater than optimism. However, the underlying factors are changing and it appears only more proof will help to cure the pessimism blues.
In the feeder cattle, the lack of response to a million acres burned in Texas, Oklahoma, and Kansas, is interesting within itself. Death loss from this was noted to be high in cattle and, most unfortunately, took human life as well. Feeders are lower and continual drought will disburse the growing of these animals over a longer period of time as some will go to other regions while others straight into a feed yard. Another natural factor materializing that helps to break down the "wall" of cattle.
Technical indicators are turned due north early in the day. With aspects of fat cattle most likely higher than $102.00, as dictated by the August and October futures, this is encouraging yards to go bid for inventory while feeders are still under $130.00. Unlike the fats, pessimism is turning quickly into optimism. The change from negative to positive basis is the most encouraging aspect of change in the feeder market.
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.