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“Shootin’ The Bull”
Commodity Market Comments
by Christopher B. Swift
March 22, 2017
Most of the futures contracts traded at present were conceived in a bear market environment. Hence the sharp discounts. Disbelief of a reversal of the environment has stunted the ability of the futures to react to the change. The cash market is the market and it says cattle are worth $136.00. You can believe what you want about the future, but cash out of packers pockets today was at $136.00. So, although fats may, or may not be finding a top, with the environment no longer a bear market, there is little to do but aggregate the antiquated futures price to the current cash price. With these discounts moving all the way out to April of ’18, there is tremendous work to be done to achieve an even basis, at any price level, of the expiring contract month as they come about.
There were a few new developments that occurred today. One is that at the end of the FCE trade, futures didn’t sell off, they remained at their elevated levels on the day. This suggests the trade is attempting the aggregation of the basis. Potentially, this signals, along with ever increasing open interest, that mentality is changing. Another change is that more traders now see the aspects of the JBS-SA ordeal to be more important towards US exports than initially thought as it appears beef producers are scrambling to defend themselves. Today, futures traded limit up. How long has it been since we’ve seen this? These factors are important. I recommend you not ignore them.
The price range today begins to skew the wave count away from the thoughts of this rally being a B wave. Hence, reduces the likelihood of a C wave decline. I did notice the boxes were lower at mid-day, but that didn’t seem to slow anything down. There remains a lot of jostling to go through, but all in all, the change in environment alone should help considerably towards staving off the supply bears.
For the first time in a long, long time, you can hedge August feeders at a dead even basis. The $136.00 put closed at $5.85 producing a minimum sale price of $130.15 with the index reading today at $130.02. All the months prior for nearly 2&1/2 years, hedging was done at a discount and made more severe by the premium paid for the option. I don’t have a clue how high traders will push this market. What I do know is that you have seen a more friendly environment for which to manage risk than at present in a very long time. Hence, use it. There remains 3 more quarters to trade through and while the market is hot, use it to your advantage. I’ve attempted to stave off hedging as long as possible as I’ve anticipated the change in the basis. The change has materialized and I recommend using it. How you use it will be as important as you using it. First, if your inventory is to be marketed between now and May, you may consider a synthetic short futures position. Due to limited time, even if the market remains strong, detriment would not be anticipated great due to the call strike still allowing for a predetermined amount of upside potential. Recall that cattle being sold today, were most likely purchased at the lower end of the price range 3 to 4 months ago. Next, if they are summer/fall cattle, then a bear put spread is recommended. An at the money put would be complimented with an out of the money put with at least a $10.00 spread. The achievement attempting to be spending a lesser amount on premium, with a predetermined downside factor, and the knowledge of having to make another decision if the $126.00 area is exceeded. The belief is the $126.00 area won’t be exceeded. If it is though, then you make another decision, but the compliment is that you don’t have to make it under duress as you already captured 2/3 of the initial decline to the $126.00 area. The goal here is to minimize premium paid in order to write off less from your final sale bill.
The price action remains a primary wave 1. The 5th wave of primary wave 1 has extended. There may still be some left to the upside, but today’s price action was such that I perceive a great deal of it was a “get me out” mentality from those who hedged too soon. I’m not talking about just this week, I’m looking at those with hedges under $122.00. This week still have a few crooks and turns with the majority of the cash trade looming, choice boxes lower today, and the on feed report Friday. It doesn’t appear that the cold storage report will have much of an impact.
Instead of planting grains, it appears traders are wanting to pound them into the ground.
Crude rebounded after a new low in this decline was made. The down ward trading is beginning to look more trendy than sell offish. A trade back above $51.00 June will confuse me further, but would more likely begin to suggest traders are having a hard time pushing it under $50.00 and holding it there.
Anticipate bonds moving sideways, in a large range, for a very long time.
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Analyzing your current financial situation and taking current breakeven goals into consideration
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