Given the Fed mandate and intention of taming inflation amid a rally in the US Dollar, the last area in our view that we have seen price pressure has been in the livestock markets. A few reasons in our view for the three-month rally that began in early September. Per USDA, Cash Cattle prices are up over 20 cents from this time last year in all 4 major regions while the Feeder Cattle index in up 20 cents at 2.59 currently vs 2.39 in early September. In our view the reasons for higher cash are scarcity (fewer animals) while demand remains firm as consumers still prefer beef. Lower supplies and good demand equal higher prices in our view. This comes against the backdrop of the S&P and Dow hitting all-time highs post-election. In our opinion these factors have become priced in. In the short run, we think cattle markets could face some pressure as we head into year-end as managed funds have a large long position of 115K long futures and options with cattle prices are near all-time highs on the continuous chart and thus far are finding it difficult to challenge the high. We think the struggle the market is having at these levels coincides with the thinking that the packer struggle with profitability could lead to a cut back in slaughter and demand for cattle. Cutouts are already weakening and it seems retail buying for the Christmas and New Year holidays is for all intents completed. The holiday will also lead to seasonal cut backs in slaughter and the packer has purchased cattle with time so they may be in good position for the near-term. We also think the packer is sending a warning shot to producers with Tyson and Cargill making organizational changes to their companies with cutbacks. With all this in mind please consider the following trade.
Trade Idea
Futures-N/A
Options-Buy the January 189 put and sell the April 196 call for even money, plus trade costs and fees.
LEJ25C196:F25P189[1-1]
Risk/Reward
Futures-N/A
Options-The risk is unlimited. This trade is structured for cattle producers. One is long the January 189 put. January 25 options expire on January 3rd. We are looking for a price break from current levels on the February futures above 188 to revisit the 184/85 area. Should that occur, we advise exiting the spread. If one holds the spread past January 3rd and February live cattle futures settle below 189.000. One would be exercised into a short February 25 cattle futures contract at 1.89.
Sean Lusk
Vice President, Walsh Commercial Hedging Services
Direct: 312-957-8103
888.391.7894
Fax: 312.256.0109
[email protected]
Register for Sean’s Grain Market Outlook Webinar on Thursday, December 5th at 3PM CST
View a Recording of Sean’s latest Grain Market Outlook Webinar
Ben DiCostanzo
Senior Market Strategist, Walsh Commercial Hedging Services
Direct: 312.957.4163
888.391.7894
Fax: 312.256.0109
[email protected]
Register for Ben’s Livestock Outlook Webinar on Tuesday, December 3rd at 3:15PM CST
View a Recording of Ben’s latest Weekly Livestock Outlook Webinar
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