For those interested I hold a weekly livestock webinar on Tuesdays and my next webinar will be Tuesday, January 21, 2024, at 3:15 pm. It is free for anyone who wants to sign up and the link for sign up is below. If you cannot attend live a recording will be sent to your email upon completion of the webinar.
The cattle markets, both live and feeder cattle futures have come a long way. Live cattle just made a new all-time high for the lead contract (Feb contract) at 199.10 on 1/15/25. That said we are possibly seeing the potential for the market to stall as we are near the “magical” or more importantly “psychological” 200.00 level. This is a big level in our opinion and traders could be are wary of price up at this elevated level where a lack of buying conviction may enter in the market. With the historically extreme long positions in the cattle futures markets, this combo could create a topping atmosphere in the near term. CFTC data shows managed money long 143K live cattle contracts, just shy of the record of 155K. CFTC also says the managed long in feeders at 26K. Cut out prices have seen the highest prices since the pandemic, peaking also on January 15th at 334.14. Cutout prices are in bullish mode at the moment in our opinion, will this prod retailers to start to price beef out of the reach of the consumer? The consumer in our view has been instrumental in giving the producer the demand needed to warrant a higher cash price. It is our opinion demand for beef has been off the charts. USDA cited beef consumption in 2024 was the highest since 2009. The question is “Will it last?”. We have a new President/administration coming into office and the possibility exists that a change in trade policy regarding new tariffs on various countries which could result in higher beef prices. We just don’t know what effects tariffs will result in, and who may be targeted, and at what percentage. Lots of unknowns there and this creates uncertainty. The packer continues to slow slaughter on two fronts. First, it is our belief part of it is to attempt to raise cutout prices. Second, the other is believed by many in the trade to be the difficulty to find enough cattle to slaughter at the new weight requirements they desire. We hear many opinions from customers that the packer wants them to keep feeding their cattle for another week or two to put more weight on the cattle because they say 1,450 – 1,500 lbs. is too light. Could this eventually lead to the producer falling behind in sales and having to let cattle go at packer prices? We just don’t know. The USDA’s monthly cattle on feed reports in September and October hint to an expansion of supply at time of lackluster consumer and global demand for US origin beef in our opinion. Export sales reports from USDA show sales have sagged at the end of 2024 into 2025 as the US dollar has soared from 103 (pre-election) to a recent two year high at 1.10. To me this is a time where we think it wise to have to put protections in place as we get into February where the roll occurs to April and then the summer months. Option idea below. We want to be bearish near-term April 25 options, but long the summer contracts, particularly August options. We think the underlying scarcity will once again enter into the market prior to summer grilling season, but a break in price could enter in soon. In closing, we believe we are seeing funds near record longs, cutouts at highest prices since pandemic, consumer consumption at its highest levels since 2009 and futures prices at all-time highs and near critical psychological levels. These are predicates or reason for a correction in our view. Trade Idea below.
Trade Idea
Futures-N/A
Options-Buy the April 2025 2.00 puts. At the same time sell the August 25 Live cattle 204/198 put spread. Suggested cost to entry is even money minus commissions and fees.
Risk/Reward
Futures-N/A
Options-Margin here to put up per 1 (3-way option spread) is $2041. I would risk $1200 maximum or 300 points from entry plus trade costs and fees per spread. The gameplan and success of the trade is the value of the 2.00 April 25 live cattle puts when we exit. We are looking at buying that put at 400 points while selling the August 204 vs 198 spread at 400 points. Hence, we enter in at even money. We project that April fats retrace and correct back in the low 190s. Fat cattle on the Board closed 2024 at 191. Should we revisit that level, we will look to exit the April 2.00 put for 1200 points or a $4800 collection. That leaves us with a short August put spread the 204 vs 198. We are short from 4.00 points approximately. We project a rebound in the August 25 futures prices back to 2.00, where we will have orders working to buy back the put spread at 2.00. Total collection here of an additional 200 points minus trade costs and fees.
Benedetto DiCostanzo
Senior Livestock Analyst
Walsh Trading, Inc.
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
312 957 8103
888 391 7894 toll free
312 256 0109 fax
Walsh Trading, Inc. is registered as a Guaranteed Introducing Broker with the Commodity Futures Trading Commission and an NFA Member.
Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
All information, communications, publications, and reports, including this specific material, used and distributed by Walsh Trading, Inc. (“WTI”) shall not be construed as a solicitation for entering into a derivatives transaction. WTI does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.