Discount to Cash Supports Bounce | RJO Futures

May 17, 2017 3:44PM CDT

The swift move higher from mid April to early May surprised and squeezed many speculators and hedgers. At the same time, the board provided healthy hedging opportunities despite the large difference between futures and cash.

Going into the late April spike, the tight front-end fed cattle market was clearly present. My blog on 03/22/17 referenced a statement from the prior to the COF report for data as of March 1.

“Using  the  average  of  analyst estimates… well as inventories and placements from previous months we calculate that on March 1 the supply of +120 day cattle on feed  was 3.248 million head, 16.3% less than the same period a year ago.  In March 2012  this supply was well over 4 mil head and in March 2013 it was +3.7 million head. Tight front end supplies and robust cutout values remain supportive of cattle prices.”

The chart trend was clearly higher since October of 2016. Managed money had built a long position going into the tail end of a seasonally bullish time of year. Futures bounced off of previous highs in early April and bounced swiftly for 3 weeks into the LT value area in front month futures between 116-120 that I had mentioned in prior blogs.

At that point, a perfect storm of events (Trump/China, under-bought cash trade, gap lower US$ and gap higher US equity market) provided catalyst for the squeeze. Cash has not settled back much and presumably will remain firm while the large placements of feeders build weights back into the front end supply. With 2.5 billion of beef going to China and a weaker US$ this may take some time. While cash is this strong there is less incentive for the feedlots to rebuild and weights are decreasing.

Moving forward cash will be closely followed. Last week cash was trading 137-138. This large futures discount to cash makes it fundamentally difficult to sell the futures are this stage. Additionally, the charts bounced well off of the .382 and .500 retracement levels based on EOD charts in live cattle June futures. The charts are also in a “whipsaw range” of Dave Toth’s key levels in June futures at 114.425 and 126.875. Finally, one Elliott Wave interpretation I follow points towards the charts actively in a wave 4 move targeting new highs. Consider current prices to be in a trading range, but favor the long end.


Oct '17 Feeder Cattle Daily Chart

Oct '17 Feeder Cattle Daily Chart

Source: Trade Navigator

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