Where's the Beef?
Fundamentals
Apparently not in the feedlots, as the U.S. cattle herd is expected to be at its lowest levels in over 50 years. The main reason for the large drop in future "hamburgers on the hoof "was due to lower beef demand tied to the weak economy as consumers switched to cheaper sources of protein. Lower beef and dairy prices this past year gave cattle ranchers and dairy farmers little reason to expand their herds, as many were operating at a loss due to lower product prices. However, there are some signs that cattle prices might be in for a rebound this year, especially if exports improve to Asian nations such as South Korea and Taiwan after last year's 3% decline in U.S. beef exports. However, the ban on U.S. poultry exports to Russia have some traders concerned that a larger supply of poultry hitting the U.S. market will weigh on beef and pork prices, as consumers switch to this potentially cheaper cut of meat. Traders are estimating the U.S. cattle herd to have fallen to about 93.17 million head as of January 1st, down nearly 1.5% from year ago levels. We will get the official government estimate this afternoon, when the USDA releases its semi-annual report on the size of the cattle herd at 2 pm Central time.
Trading Ideas
Although the short-term trend points to lower cattle prices, reduced cattle inventories and potentially improved export prospects might sway traders to a more "bullish" slant later this year. Traders looking for an up-tic in cattle prices might wish to explore the purchase of bull call spreads in the summer-month live cattle futures options. An example of this trade would be buying the June cattle 88 calls and selling the June cattle 94 calls. With June cattle trading at 87.525 as of this writing, the spread could be purchased for about 2.00, or $800 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $2400 minus the premium paid if June Cattle is trading above 94.00 at option expiration in June.
Technicals
Looking at the daily chart for April live cattle, we notice prices falling nearly $3 per hundredweight since the recent highs were made on January 20th. The sell-off took the market south of the 20-day moving average, which is viewed as a "sell" signal by many short-term momentum trading systems. However, there appears to be strong support at the 100-day moving average, currently near the 88.60 area. The 14-day RSI has turned neutral, with a current reading of 48.38. The most recent Commitment of Traders (COT) report shows large speculative accounts holding a large net-long position in cattle futures as of January 19th of over 86,000 contracts. However, this was just before the recent sell-off, and we should see this long position trimmed substantially when this afternoon's COT report is released. Support is seen at 88.60, with resistance found at 91.35.
Mike Zarembski, Senior Commodity Analyst
