Cheaper Beef Ahead?
Today's Idea
The current ample supply of Cattle in feedlots and potentially tighter supplies later this year seem to suggest that traders might wish to explore bear spreads in Live Cattle futures. For example, the February 2012 futures could be bought and the October 2011 futures sold. As of this writing, the February contract was trading at a 4.325 premium to the August contract. Traders in this spread would want to see the February premium increase.
Fundamentals
The historic rise in Cattle futures prices is seemingly at an end, as a bearish Cattle on Feed report last week may have been the final piece to cheaper beef prices coming this summer. Last Friday's report showed Cattle placements in April up 10% from year ago levels, as the continued drought in the Southern Plaines forced Cattle to market earlier than normal. In addition, the total number of Cattle in feedlots as of May 1st, was up 7% from the previous month. The potentially increasing supplies of Cattle coming to market in the next few months sent futures prices down sharply to start the week. The most active August contract has already fallen nearly 20 dollars per hundredweight since the highs were made back in early April of this year. The most recent Commitment of Traders report shows non-commercial accounts are trying to liquidate their net-long position in Cattle futures, shedding just over 5,000 contracts for the week ending May 17th. These large speculators are still holding a net-long position of over 70,000 contracts, which may trigger further long liquidation selling should futures prices continue to decline. A stronger U.S. Dollar and weaker cash beef prices were also weighing on Live Cattle futures prices. Though the near-term trend is bearish, the increased placements may spur a much tighter market later in the year, especially with Corn prices trading near record highs. The combination of high feed costs and fewer potential head of cattle in feedlots this fall or winter could send prices back to near-record levels as 2012 approaches, especially if we see signs of continued economic improvement.
Technical Notes
Looking at the daily chart for August Live Cattle, we notice that prices are now approaching the 61.8% Fibonacci retracement level drawn from the contract lows to the contract highs made in April. This support level will need to hold if we expect to see a price recovery. Current momentum is very weak, with the 14-day RSI moving well into oversold territory, with a current reading of 15.47. If the 61.8% retracement at 102.900 does not hold, the next major chart support point is not seen until the 97.500 area. Resistance for August Cattle is found at the 200-day moving average, currently near the 108.400 area.
Mike Zarembski, Senior Commodity Analyst
