Posted On: 06/07/2016
By Cassie Fish, http://cassandrafish.com
The violent and vicious sell off in CME cattle futures yesterday left most participants in futures trading, cattle feeding and the beef business stunned.
There was no event of shocking news, just a +400 point collapse in about an hour on the heels of bullish cattle and beef fundamentals. It was yet another failure at the 100-day moving average, which seems to become more significant each month. Suspicions are highest (though not provable) that the trades generated by computers, started the selloff. Resting orders, orders placed in advance by traders, are not as common as in the pit trading days of the physical order deck, so sell orders seek buy orders of size in the virtual order deck by plummeting lower like a heat seeking missile. Someone who might have been inclined to buy a break yesterday can hardly react quickly enough to do so, which, gives them too much time to think twice about stepping into the firestorm of trading cattle futures.
This change in the way commodities, financials and stocks are traded has been underway for the last decade. Its impact has altered livelihoods and continues to do so. There are dozens of article and books on the subject. The exchanges benefit, as do the larger firms who have embraced and capitalized on this approach. Those that have not jumped on this bandwagon, if still trading, have become more reactive in nature, responding to the dramatic impacts of computerized trading, many times baffled by the loss of importance that key fundamental drivers seem to have.
At the same time, there are other broad changes occurring within the context of the cattle feeding and beef packing industries. After a decade of losses and contraction, beef packers have emerged leaner and more profitable, able to capitalize on the sacrifices made.
Since the major top in 2014, cattle feeders have closed out two turns of cattle posting big losses. It is proving extremely tough for the cattle feeder to claw back margin from the packer now as supplies begin to ebb slowly higher and that is not likely to change if the precedent set by the hog industry provides any guidance.
Change is tough. These couple of major shifts are only part of the picture. What can be done or should be done is left to debate. But much-more-common volatility in cattle futures is stretching into years now, not months.
Today cattle futures have recouped some of yesterdayâ€™s loss and ideas that cash cattle prices will be fully steady this week are still on the table. It will take more than todayâ€™s rally to heal the technical damage done yesterday which set up a potential huge outside week with a lower close, if most active Aug LC closes below $117.80, last Fridayâ€™s settlement. This weekâ€™s high and low are now the new lines in the technical sand that traders will be closely watching.