PLAINS MARKET TALK
It is unusual on Thanksgiving week for trade to be
undefined by midweek. Packers are generally anxious to tie up inventory
before most people take off for the week, but these are unusual times. Very
small volumes of cattle continued to trade in the north at steady money but
the bulk of asking prices were higher. Live prices were $125 and dressed at $195.
Futures prices are anticipating higher prices, but that also doesn't make it
happen. Friday will feature a shortened futures close at noon.
The largest drag on beef sales has been the grind. The
cold storage report released this week posted one of the largest inventories
of ground beef in storage for recent years. Most ground beef blends are
selling 50-75% under last year and continue to represent a large portion of
beef sales. Margins should be good for retailers and the timing good for a
turn to beef. Both choice and select cuts gained a dollar at mid week. The choice cut was quoted at $204 and select lower at $194
leaving the spread at $10.
The feeder index has been falling in dollar multiples as
cash prices tumble for replacement cattle across the country. Most auction
barns will be closed this week. Oklahoma City was the exception and trading
was active with demand good and prices up to $5 higher. Trading in yearling cattle is drawing to a halt for the
year as most replacement cattle hold off marketing plans until after year
end. Feedlots sitting with empty pens need cattle but with lousy margins and
oversized losses on current close outs, there is little optimism.
Corn futures flattened out at mid week. The corn basis is
remaining flat in most regions. Corn remains in a
trading range between $3.50 and $4.00 a bushel. The corn basis in Guymon,
Oklahoma is currently quoted at +$.40 over the December contract. Corn is
now pricing into rations at $7.15 cwt. in the Oklahoma Panhandle.
HUNTING FOR THE BAD GUY
While all classes of cattle are selling at large discounts
to last year, sometimes exceeding $500-600/head, there is no assurance the
new purchases will be profitable and most are certainly not hedgeable. This
points much of the frustrations of those in the business of owning cattle
towards Chicago and the futures market at the CME. Editorial comments across
most livestock publications directed fault to the CME and the relatively new
electronic trade matching platforms. The problem as identified by many
critics is High Frequency Trading and its role in volatility. The charge
asserted is that computerized trading has created an unreliable cattle
futures contract plagued with high volatility and movements lacking any
justification in market fundamentals.
High frequency trading is greatly misunderstood.
Transactions falling under this fuzzy banner include both legal and
questionable practices. It is no surprise in a world of electronic trading
that traders wanting to execute orders based on market breaking information
would want to have those instructions sent to the CME trade platform, called
Globex, as quickly as possible. The order from a rancher in a rural area of
the Texas Panhandle will find his order will reach the exchange slower than
a Chicago trader who is on a high speed connection close to the exchange.
The differences are measured in milliseconds but the difference can be huge
to traders who can act quicker and execute on breaking news events or any
other time sensitive releases. Traders and industry participants share in
the desire to be able to respond quickly to news but there can never be any
assurances that all orders will be received with the same speed because that
Paying for faster hardware and software to speed order
execution is not illegal. Broker firms trading on the CME are always
tweaking their software and hardware in an effort to speed order entry and
execution. Some technical traders want to respond to chart trigger points
with lightning speed and use algorithms or computer instructions that will
execute orders without human intervention. There is nothing nefarious about
this action nor evil about people who want to pay for faster speeds and
capitalize on the benefits through trading. This is after all the foundation
one of the largest privately owned company in the United States -- Cargill.
Cargill build a business on gathering information faster and making markets
in rural America with ranchers and farmers lacking the ability to receive or
act on market moving news.
The story doesn't stop here and the CME is not off the
hook for trade practices that are unfair and should be illegal. The CME is
offering large trading firms an opportunity to Co-locate [COLO] next to the Globex trade matching platform for fees of hundreds of thousands of dollars
a year. The scrutiny on this practice should center on advantages given to
those firms that would or might result in unfair trade matching.
1. Are any traders allowed to see and act on new orders
before they reach the Globex trade platform? Many orders come in through
broker firms who have their own servers.
2. Can positions be arbitraged without risk to the
traders, similar to orders in the black holes of the stock market described
in Michael Lewis's book FLASH BOYS?
3. There are traders operating on the exchange that clear
inventory of positions to -0- at the end of the day. Are they margining
their accounts like other traders?
4. Is it possible to list an order in the book of a
trading month on the exchange that can't be hit?
5. Can certain firms see a deeper look into the order book
than most traders? [most can only see the best 5 bids to buy and orders to
Frontrunning is illegal and no matter how it is described
by the exchange, if a trading firm can see and act on another person's
orders before it reaches the Globex book, without risk to the trading firm,
that should be stopped. High frequency trading is not the culprit in high
volatility except to the extent faster orders on breaking news can crash or
rally markets, the bad guy is the contract itself. The current contract is
designed for a different day and time and the high volatility is because it
is tracking and matching up against a very small pool of cash trades that no
longer represents a market. A new contract will help correct this problem.
In the meantime, the CME would go a long way to restore confidence in the
fairness of trading by answering the questions regarding trade practices.
FURTHER NOTES AND EXPLANATIONS OF BREAKEVEN/CLOSE
Readers have been sending notes regarding breakeven
projections. One commenter ask how we could use 80 cents for a cost of gain
when everyone knows that is too low. Another ask why we are using such a
high cost of gain number. The two emails illustrate the difficulty of
providing one benchmark for all regions of the country. Currently a typical
bases in the corn belt might be $1 under the futures and alternatively a
corn basis in Hereford, Texas might be $1 over the futures. The northern
feeders have much cheaper grain and more expensive feeder cattle. A more
meaningful report would include one breakeven and close out for each major
region. It also is difficult maintaining the tables when both fed and
replacement prices are changing in $5-10 cwt. price blocks.
CURRENT BREAKEVEN PROJECTION
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
|750 # Feeder Steer||1,307.93||174.39
|Cost of Gain 600 pounds||475.93||0.79
|Estimated Interest(Prime + 1%)||31.66||
|Net Profit / Loss||-126.70||-9.39
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.
|750 # Feeder Steer OKC 150 days ago||1,740.00||232.00
|Cost of Gain 600 pounds||518.25||0.86
|Estimated Interest(Prime + 1%)||34.92||
|Current Texas Panhandle Cash||1,713.69||126.94
|Net Profit / Loss||-579.48||-42.92
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