Wednesday, August 24, 2011
Lower Cattle inventories early next year could see Live Cattle futures prices move to new all-time highs, especially if a weak US Dollar keeps Beef exports robust. Some traders who are expecting higher prices for Cattle next year may possibly wish to explore the purchase of a bull call spread in February Live Cattle futures. For example, with February Live Cattle trading at 120.575 as of this writing, the February 124 calls could be purchased and the February 134 calls sold for about 2.55 points, or $1,020 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade and has a potential profit of $4,000 minus the premium paid which would be realized at option expiration in Early February should the February futures be trading above 134.000.
The historic highs for Live Cattle futures may take a much needed pause this fall, as Labor Day holiday demand begins to wane and the large number of young Cattle currently placed in feedlots finally comes to market. The most recent USDA Cattle on Feed report released this past Friday showed Cattle placements increased by 22% from year ago levels. The reason for the sharp increase in young Cattle placed on feedlots has to do with the severe drought in the Southern plains, which has devastated pasture land and forced producers to reduce the size of Cattle herds by either moving lighter weight Cattle to market or putting them in feedlots despite record high Corn prices. This sets the stage for higher beef supplies this fall, as the Cattle in feedlots comes to market but will result in much fewer head of Cattle being available in 2012. Cash Cattle prices have been holding steady around $114 per hundredweight this past week, as packers obtained supplies for the upcoming Labor Day holiday weekend. However, as we move into September and October, the potential for large supplies of market ready Cattle could keep buyers from aggressively bidding for supplies. One potential bright spot has been in beef exports, which are running well above year ago levels. The USDA reported beef supplies in cold storage fell by 3% in July, which is a sign of good export demand. The real story looks to be in early 2012 when supplies will be down sharply and the market will need to adjust to a tighter beef supply situation.
Technical Notes
Looking at the daily chart for October Live Cattle, we notice prices have broken down below the wedge formation, which may signal the start of a downtrend in prices. Prices are hovering around the 200-day moving average, and a strong close below this widely watched moving average could send prices heading for a test of the June 1st lows near the 108.000 area. The 14-day RSI has turned lower, with a current reading of 40.63. Near-term support is seen at the recent low of 114.200, with resistance found at the 20-day moving average currently near 117.625.
Mike Zarembski, Senior Commodity Analyst