I think feed yards have are in good enough shape to resist lower packer bids. I think that the US consumer will continue to purchase beef at the elevated level above pork for the time being. These two factors, coupled with the large kills that are crumbling the wall of cattle, leads me to anticipate fats to firm. With this, I think it will be much more difficult to push cattle into a bear market. Today’s higher trade in the October contract has begun to turn the charts very friendly. Not that I don’t expect some down drafts, but overall, I anticipate a firming trade. Today’s trade of October above $108.55 begins to suggest that a new minor wave count to the upside is unfolding. A trade above $111.52 October is now anticipated. Above this price level would lead me to anticipate a thrust higher towards the contract high and potentially above. This relief from front end pressure is anticipated to allow the back months to move higher. This afternoon, February settled within a few tics of the July 5th close. A close above $116.87 February will lead me to anticipate a new contract high above $119.00. Lastly, I sent out a small piece of information this morning on China’s sourcing of beef from France. While I do not view their actions as desperate to obtain beef, but yet a strong desire. The US had the pump primed before the tariff issues began. Were they to be resolved sooner, rather than later, I do not think too much of the work already done will fall into disrepair. Were the tariff issue to drag, other countries will fill the void that US beef should be. I know many don’t see or won’t see the benefits to China consumer market for beef. It’s a long hard road with many barriers to cross. However, the amount of beef that could flow across the seas has the potential to put beef on a much more stable production scale. Going forward, producers will have to forever be mindful of the packing capacity and attempt to not tax it.
The amount of movement in the cash markets have boosted the index from the end of May approximately $15.00. Recall that the basis had been as much as $13.00 negative towards the first of June. So, the futures have jockeyed around a lot and the cash market just firmed. This rally from $133.41 to present on the index is believed to be intermediate wave 1 of major wave 3. An intermediate wave 2 on the index is anticipated, but I do not know from what level. Until the fats begin moving higher, I don’t think yard managers will press the feeders too much harder. What the majority of this analysis tells me is that the likelihood of going into a bear market is diminishing. October feeders closed at a new high today from the contract low. The August may have, but I am not sure as I don’t have the settle price in front of me. So, with new highs, technical indicators turning higher, I anticipate feeders to begin to firm. I remain hesitant to say a bull market, but after having read Saturday’s “Cattle Range” comments, it seems the production cycle is turning and the industry appears to be in good shape. Going forward, I think it will be difficult to tax the packing capacity. Therefore, packers may actually have to go bid against one another to attract the inventory needed. A trade above $153.82 October will set the stage for what is anticipated to be an intermediate wave 3 rally. Stay away from the August and September contracts for speculation. They will not distance themselves from the index by nearly as much as the out months can. I will look to sell the August and or September calls against existing put option positions were a new high above $154.00 to be made August.
Grains did little today. I was quizzed today on DDG’s that will need to be purchased soon. I believe that selling the December corn puts against DDG purchases would produce a very like scenario as were you buying corn. I know there are subtle differences and basis as always a risk. If this has some interest to you, we can discuss it at your convenience.
Energies are in a hyper volatile state. Diesel was down over $.07 today and closed right around the $2.06 area. A trade down to $2.00 would be viewed as an opportunity to top off farm tanks. Were traders to get serious about selling off crude, then around the $1.90 area would have me buying call options for fuel needs at harvest.
US Treasury Bonds:
Bonds softened. They continue to trade at the upper end of the range. Today’s action was not determining in any way. I anticipate bonds to continue to trade at this elevated level and would not surprise me to see them trade some higher.
July 16, 2018