A Relentless Free Fall

By Cassie Fish, http://cassandrafish.com

CME cattle futures plunged lower and breaking dramatically on today’s opening, in some cases gapping lower. The market reached new lows for the move, October and December 2024 contracts and feeder cattle contracts making life-of-contract lows. Today’s break has had signs of capitulation, but after a rally back to green, the market has failed yet again. Many in the industry have lost confidence in the CME’s live cattle and feeder cattle contracts. These contracts, with their supersized daily limits that are greater than cash ever trades in one week, let alone in one day– are the tail that wags the dog. The tail in this instance being greed and the dog being fear.

Some are explaining the bottomless sell-off with speculation that those short puts are selling futures to offset their position, and logically there is truth in that. This mature bull market was in a trading range for months, was carrying fairly low options volatility and some likely sold out-of-the-money puts assuming the trade was low risk. Those puts are now in the money and the financial pressure on those positions is immense. Some are linking the short puts to the Livestock Risk Protection insurance program offered through the USDA https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Feeder-Cattle . The short definition is LRP was designed to insure against a decline in livestock market prices. Lots of folks are talking about the possibility that the increased use of LRP has had unexpected bearish impacts on futures and option in cattle futures and perhaps if the LRP was part of a more complex options strategy there is truth to it. But the degree of impact is not quantifiable and remains a speculation.

One thing that is factual is that managed funds have reduced their net long position from 119k to 36k since the last week of September. That selling is in a public record. Friday’s CFTC COT report showed that managed fund net position had dropped again to a new low for 2023, 36k contracts as of the close, Tuesday, November 28, which feels like a lifetime ago. Other major bottoms in cattle futures were made with a lower net long position than 36k, most recently in 2019 and 2020.

There is no doubt that slow harvest rates since April, more days on feed, increasing carcass weights (record high on last report), and two months of higher-than-expected placements of feeder cattle from Mexico, Canada and those of dairy origins have combined to tip the scale from bullish to bearish. But this blood bath of a futures break has ventured way beyond the facts listed in the prior sentence. And there is no let up as fear grips and panic soars. Experienced traders may believe this break is way overdone given the long term fundamentals, but no one is willing step in front of the runaway train, known as CME cattle futures.

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