Varilek’s Cattle Call: Futures Rally
The futures market has enjoyed a $24 rally since the effects of this spring. Last week we saw a breakout of the top side of the latest range in the cattle markets. Open interest in live cattle futures has finally started to increase. Cash price was not the leader in this latest rally. Currently with the open interest being small, it creates more volatile moves when the futures capitulate. It is easier to move a market when less players are involved, but with the higher futures prices, we may finally have opportunities for more traders to enter. If cash does not follow, deliveries on the August board will be a threat or an opportunity for the industry.
The topic of around the 50-14 negotiated cash mandate and effect on beef quality continue to arise. One of the main reasons the 50-14 bill was introduced is because producers in the north do not have the ability to compete with the larger corporate feeders winning out on commodity cattle in the south. The system is currently rewarding quantity over quality which gives the packer leverage when large quantities of cattle are committed on formulas. We currently have a system where southern breeds and Mexican cattle can get a better price than northern quality cattle filling the sale barns and yards in the upper Midwest. Family feeders with the best cattle that walk on Earth want to be able to ask for more.
Another point on quality would be to compare to the hog market. After the pork industry vertically integrated, what is now the number one hog breed? There really is not one. The incentive is placed on get them in and get them out leaving pork flavor not a priority. I am led to believe the 50-14 mandate is great for producers wanting to raise quality cattle.
Feeder prices are nicely maintaining a significant premium to breakevens on the board, but that can be typical for July and August prices. One of the oldest cattle trading quotes is “the feeders are the leaders.” That is the case with the latest rally, and we are happy to see some life forming in the cattle industry.
Scott Varilek, Kooima Kooima Varilek Trading
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. F
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