Wax On-Wax Off
It is the opinion of AgOptimus that since our February 16th high, Traders and Money Managers have been making these livestock markets do some strange things. Futures understandably sold off when the Russians invaded Ukraine, but since then it has been a back and forth, depending on the week, of Risk On-Risk Off. When the Fed Cattle futures had a bullish look to them, the market would sell off. And the opposite would happen, as recently as last Wednesday, when Summer Fat futures looked bearish- a low was put in. So how do we accurately know what the market is trying to tell us when volatile conditions exist? Watch the basis and spreads.
Because of the balancing of their portfolios, and wanting to take some risk off, the Funds liquidated more than half of their long positions in the fats. And what better time of year to capitalize on this than coming into summer. If you held an April long position, with good feeding weather and high weights, would you roll out of April and go long June or August? We believe seasonals show that is a fools bet most years. So, take the profit off the Aprils and sit on the sidelines, which is exactly what we believe has been happening. But the spreads are narrow for this time of year- what does that mean? What is happening in the spreads is a result of the bullishness in our current market. How many of you would typically have your summer fats hedged up or contracted by now? With everyone thinking fewer fats are just around the corner, we may have put fewer hedges on than recent years, which leads to lack of sellers on the June and August contracts. With lack of buyers in the April contract, this close to expiration, and lack of hedgers in the summer months, we can claim this is part of why that spread is this narrow.
Looking at the basis for this time of year, in the North, it has been ranging from +$1 up as high as +$5 on a couple days this month. That is normal for the area, with +$5 being the months normal average. In the lower feeding region, it has been a -$1 to +$2, depending on the day. Pretty typical as well.
Put this all together, and you have lack of buyer participation, and feed yards hitting any type of positive basis thrown their way. Futures waiting for cash to pop, and cash waiting for futures to lead the way. Given the current economic risks that exist, I wouldnt expect the funds to get overly aggressive buying futures at these levels. Contrary, they could take a risk off approach until the market dips to levels that look like a bargain. Wax on-Wax off, Risk On-Risk Off!
We believe one of the best ways to maneuver in these types of volatile markets is using OPTIONS!! Dont want to miss out on the home run, but you dont strike out either. With current inflation, cattle are due for their day in the sun. And with Cost of Gains at extremely elevated levels, we need to see the sun. But with the numbers of summer cattle coming, and the summer board in the upper 130s, dont expect buyers to flood the futures market like the grains. And get the grill cleaned and steaks thawing, an Easter Ribeye is healthier than the candy you usually steal from your kids Easter baskets.
Looking to Trade or Hedge Cattle Please reach out and let’s chat…
Dan Gerhold
319.320.4774
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