They’re back

Opinion
Mar 19, 2010

Two years ago, futures markets started to take off about this time of year. Grain, cattle and hog contracts took off like a rocket. Thoughts were that fed cattle would be in short supply and demand was pretty good. But, it just didn’t seem to make sense; the fundamentals of the cattle industry weren’t supporting the big move. It was all about commodity trading funds and index funds going long on the Chicago Mercantile Exchange (CME) board. When they decided to let the air out of the market, it quickly became a sad state of affairs.

Now, the funds are back, going long on the board and driving live cattle up to $95-97. We have seen a $14 rally in live cattle over the past 10 weeks. Don’t get me wrong, this is great for cattle feeders who have been on the short end of the stick for quite some time. However, I don’t think demand is all that much better. We know that fed supplies of cattle are down 3 percent or so from the previous year, but slaughter is a bit smaller, down 0.04 percent and total beef production is down 1.6 percent due to lower carcass weights from a fairly rough winter feeding season. But it doesn’t seem to translate into the same sort of optimism we’re seeing in market prices these days.

This institutional interest in livestock has taken feeder cattle much higher, up about $12 on yearling cattle and calves are alsoup dramatically. Between Oklahoma City and Oklahoma City West, they have marketed about 25,000 head of calves and yearlings a week for the past few weeks. Big prices always find lots of cattle.

Analysts are suggesting that placements into feedlots will be up around 3 percent from a year ago. It may be that there are more wheat cattle this year than last. But nonetheless, the August feeder cattle board reached $110 last week. June hogs are over $82, up nearly $26 since the first of the year.

Darrell Mark at University of Nebraska-Lincoln points out in his weekly report that the Commodity Futures Trading Commission’s commitment of traders report that most commercial traders, such as feedlots or packers, have a cash position and are hedging that position with a futures contract. Only 9 percent of cattle are hedged. Non-commercials are speculative commodity funds, and index funds, and are responsible for the bulk of the remaining activity in the CME market.

Mark said that commercials were long on 121,491 contracts and short on 169,980 contracts; however, non-commercials were long on 92,074 contracts and short on 30,289. Obviously, the non-commercials are speculative long hedgers, just like they were in 2008. Remember the build-up in the December 2008 live cattle contract that reached $116? The cash market never came close to hitting that level.

Mark says: "The current situation, with commercials being heavy short and non-commercials being heavy long, seems to suggest the market may be due for a correction."

The $14 increase in nearby futures prices since the beginning of December appears to have been generated scale-up selling by the commercials—cattle feeders—suggesting that this group of traders believes fundamental forces could make the price decline at some point.

However, Mark also said that knowing the net long or short positions by either trading group doesn’t really provide strong evidence of when price may change direction. Supply does make a difference. Carcass weights are 21 pounds below last year and, coming into seasonally higher demand season, may support the market this spring and summer.

There is a point when markets move because of the fundamentals of supply and demand. Then, there are times they don’t, like right now, with hedge funds rallying the board to unexpected new highs. It’s great to be on the side of these non-commercial speculators because they do influence the cash market. But when they leave and pull the rug out from under the market and we start the short selling, it can get pretty ugly, pretty fast. This is one of those times to be very cautious if you’re using the board to cover your cattle. — PETE CROW

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