Why Your Steaks May Cost More Next Year!
Monday, July 25, 2011
Some traders anticipating higher Live Cattle prices in early 2012 may possibly wish to consider buying a bull call spread in Live Cattle futures options. For example, with February Live Cattle trading at 122.425 as of this writing, the February 124 calls could be bought and the February 134 calls sold for about 3.20, or $1,280 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade which has a potential profit of $4,000 minus the premium received, which would be realized at option expiration should February Live Cattle be trading above 134.00.
Fundamentals
The recent heat wave that struck the central portions of the US over the past several days has played havoc with livestock production - and particularly Cattle producers, who are facing the dilemma of both heat-stressed Cattle and drying pasture lands. These issues are forcing young Cattle to market faster than anticipated and at a lighter weight. The upshot of this is that the supply of beef is increasing at the same time that consumer demand is falling due to the high heat, which is hurting the demand for protein for the summer grilling season. High feed prices have also curtailed the size of the US Cattle herd, which was made evident with the release of the USDA's semi-annual Cattle inventory report released this past Friday. The report showed the US Cattle herd totaled 100 million as of July 1st. This is 99% of last year's levels and just over 3% below the 5-year average. The monthly Cattle on Feed report showed the number of Cattle in feed lots increased to 104% of last year's totals in June, and Cattle placements were also up 4% as lack of good grazing land forced Cattle into the feedlots. The report was bearish for front-month futures, according to many traders, as it should assure higher supplies of Cattle to market in the near-term. However, a declining Cattle herd may lead to a potentially tight beef supply situation heading into next year, which could lend support for winter month Cattle futures and, unfortunately, a costlier steak dinner in 2012.
Technical Notes
Looking at the daily chart for October Live Cattle futures, we notice the recent sell-off was stopped in its tracks, as prices met the 200-day moving average. However, the short-term momentum still favors the bears, with prices holding below the 20-day moving average. The 14-day RSI has turned neutral, with a current reading of 46.84. Prices are also hovering near the up-trend line drawn from the June 1st lows, and a close below this trend-line as well as below the 200-day moving average would likely put bears firmly in control. However, should prices hold above both these key levels, a test of the recent highs near the 122.00 level would not be out of the question.
Mike Zarembski, Senior Commodity Analyst
