October 20, 2014
CATTLE MARKET REPORT AND ANALYSIS
PLAINS MARKET TALK
A calming of fears from Ebola and new buying interest in
the cash markets for replacement and fed cattle sent futures higher Monday
with some contracts reaching the daily limit. Navigating the treacherous waters of livestock futures
is becoming a full time job. This past week witnessed triple digit
gains or losses every day of the week with limit moves occurring on most
days. Cattle clearly established a justification for the
enormous premiums in the "put" and "call" options.
Volatility has run amok. Amok is defined as a violent uncontrollable frenzy.
An examination of the cash prices for cattle last week would reveal
a stable business as usual activity. In fed cattle trading, the prices were steady
with little to no change. In the replacement market stocker and feeder
prices were a bit more erratic ranging from $5 higher to $5 lower depending
on where you are and what day the transactions occurred. Bottom line is
nothing dramatic occurred and there was little indication of the turmoil in
the futures market where volatility was the watchword.
First, all time highs for cattle prices has created a lot
of nervousness on the part of market participants. Second, uncertainty about
the spread of Ebola has the country sitting on edge waiting to assess
further developments. Third, world political stability seems threatened by
ISIS and the trouble in the Ukraine. Finally, economic uncertainty in the EU
threatens to spread and the global implications are anything but clear.
Given this backdrop, no one should be surprised that all markets are nervous
and volatility is on the rise.
Box prices stabilized at week's end. The weekly slaughter
number remained small and beef supplies limited. While supply
shortages will encourage switching to pork and poultry, small slaughter
numbers will keep beef on a firm footing. Choice box prices held steady
and were quoted at $249 with select at $235 and the
spread at $14.
Demand for replacement cattle continued to be the best in
the north. More cattle relative to the regional patterns are being placed on feed in
the north. October placements will likely reflect much larger placements in
the corn belt than occurring in the southern plains. With Friday's limit
move down in feeder futures, most feeders will move to the sidelines waiting
out the volatility. Bottom pickers seemed to be picking at some of the
feeder futures months as trading wound down for the week and the pools of
sell orders dried up.
Corn was lower in overnight trading Sunday night. Harvest is in mid
steam and the crop is large. Congestion on the railroads continues to plague
the availability of repeater trains to deliver corn from the north to the
southern plains. In the meantime an open period of warm weather will be
ideal for bringing in the crop in the north. Most of the corn in the south
is nearing completion. Corn
basis Guymon, Oklahoma is currently quoted at +$.50 and declining. Corn is
now pricing into rations at $7.00 in the Oklahoma Panhandle.
WHEN LIQUIDITY FAILS
The CME globex trading platform displays the best 5 bids
to buy and the best 5 offers to sell and traders can view the "Book" using
customized software provided by most brokers. To market participants in the
field and not on a computer viewing the Book, the fluctuations in the market
for cattle futures prices might seem unfathomable.
A closer look at the Book, especially in the feeder cattle
futures, provides a clear and understandable explanation. The Book of orders
placed on the exchange are simply inadequate to support the entry of larger
orders placed on either side of the market. It is not uncommon in the feeder
cattle book to find orders for 1 or 2 contracts spaced .25 cents cwt. apart
scattered up and down the price chain. The further out in the deferred
months the more scattered are the bids and offers sometimes the bid/ask
spread is over a dollar.
The implications of this poor liquidity is felt by every
trader wanting to buy or sell 10 contracts. A 10 contract order entered as a
market order [meaning fill at the best available posted price] might move
the market $1 to $1.50 dollars. Predatory traders frequent enter low ball
limit orders with the objective of filling some naive person who rushes to
get filled with a market order.
Currently lenders are encouraging stocker operators to be
sure they have protection for the high priced inventory they are acquiring.
Protecting that inventory can either be done with options or hedged with
futures. Option prices are so high as to be unaffordable [however,
unaffordable is not a useful statement if the market tanks]. This leaves an
outright hedge as a preferred course of action but good execution rests with
Not helping the situation is the fact that managed futures
brokers and hedge funds are pulling out of commodities at a time of economic
and political uncertainty. The loss of these major players on both sides of
the market is harmful to liquidity.
Poor liquidity favors no one. CME recognizes this fact and
will be changing and reducing trading hours at the end of this month. It is
the hope of the industry that this will improve liquidity and reduce
volatility. In the meantime stay tuned for sharp moves up and down in the
The Cattle Report introduces the FEEDER METER. The report
estimates profit or loss for currently purchased feeder steers and projects
a result 150 days out. The chart
is interactive and updated every 15 minutes in real time based on changes in
futures markets in grain and cattle. Corn basis information is based on
current trade prices adjusted every two weeks. Feeder prices and fed cattle sales are
par the appropriate futures contract.
CURRENT CLOSE OUT
The Cattle Report estimates current profit or loss on
cattle placed on feed 150 days ago. This report generated from
industry averages attempts to simulate a typical close out based on
prevailing purchase prices for a feeder steer 150 days ago. The close out
assumes grain was purchased at market each month. Selling prices and
interest rates are based on prevailing benchmark quoted prices. This chart
will change weekly.
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