Varilek’s Cattle Call
There has been a change of tone in the cattle market. We have finally had our first significant test lower in the live cattle futures. The slow grinding up-trend starting in November has come to an end. Carcass weights dropped another 5 pounds for the week ending March 16, which puts all cattle 18 pounds below a year ago. The toll from the weather is evident but not rallying the market like I had hoped.
The funds are still long the cattle futures. This break has not shown that those long positions have been liquidated. Keep an eye on the open interest for the funds’ direction. The end of March is the end of the quarter which can mark the end or beginning of a new shift for fund trading.
The cash market in March was a disappointment. If this market was truly strong, the basis would have been positive. The earlier highs of $208 dressed have slipped to $204 with most of these trades asking for delayed pick up from the feed yard. The packer is buying cattle for as far out as the last week of April already, showing the leverage still in their hands. I think the spring high has been made with a decline in cash prices ahead.
The March cattle on feed report had a slightly negative tone. Placements and cattle on feed were higher than expected. The marketing number was also a touch negative with the large placement number being the biggest of the hurdles. Living in northern cattle country, I struggle to understand how the placement number was that large.
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The seasonal high in the live cattle market can often occur around the third week in March. In regard to hedges, I do not feel it is wise to be lifting positions with only a few weeks distance from that seasonal high. Those hedges were part of a plan to lock in a desirable price. It is easy to handle a winning futures trade, but handling a loser is what defines the quality of a trader.
New strategies will involve measuring retracements and finding targets that work for you. Do not beat yourself up for missing the $124 sale on June cattle (hindsight is 20/20). For those looking for protection, options in the live cattle are still fairly priced. A shift in the trend has happened, but that will also allow new opportunities to arise.
The risk of loss when trading futures and options is substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.
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