Posted On: 06/03/2016
By: Gary Lark
As I write this we are still waiting for the first domino to fall to begin the cascade of all the cattle that are captive or pledged and waiting to be priced. The cash trade that establishes the market is caught between higher asking prices and reluctant bids. The waiting game that takes the trade until the very end of the week is a â€œmore often than notâ€ experience. There has been a great deal of mixed opinion about clearance last weekend and the status of demand going into early June. Cut-out values are holding up, but the conversation around beef pricing going forward is fearful. Weight data is supportive, but weights normally find a seasonal bottom soon. The question is how will they track related to a year ago once the direction turns. The choice-select spread is out over 20.00, but what this really means is hard to decipher.
Cattle futures have recovered back to the pre-Cattle on Feed close of two Fridayâ€™s ago. The much watched 100 day moving averages were approached or touched yesterday before the market fell back on the close. Volume was fairly light and open interest was little changed. The number of contracts open in June cattle is about 1,000 below a year ago on this option expiration day.
There is no rule, but it seems to me that lately we have had a tendency to rally after the options expire. If this is the case, then it would imply that cash prices will be firm to higher in June and that the 100 day moving averages will be breached. However, there is nothing magic about option expiration and history will show that both rallies and breaks follow.
Outside factors and macro-economic data have been positive, but a curve ball was thrown this morning in the form of the monthly jobs report. This â€œshockâ€ has sent the dollar, bond yields and stock indices lower and gold higher. For years, through a steady, slow and grinding recovery the conversation in this country has been one of doom and gloom. Politicos plow the fertile fields of bad news and financial analysts keep eying the horizon for the next financial disaster. Itâ€™s not that one is not looming, but it seemed that as we approached the precipice that was 2008 the same group was not sounding the alarms. Since then we have been braced for a repeat. My experience is that traders, analysts and the like are always preparing to fight the last war and not the new one that is yet upon us. This fear-laden environment keeps all forward planning conservative and may indeed help sustain a positive trajectory.
Cattle have been moving up and down this morning, not seeming sure which way to go. Maybe by the time you read this all will be certain. The hog market has been on its own run similar to what has been going on the crop side. New contract highs were made in summer hogs during a blistering three-day rally. Seems there is no fear of curtailed demand there.