01-07-2009: February Live Cattle: Importing More, Exporting Less
This is a case where technical indicators seem to be swamping out recent bad news. Faced with trade wars, lack of exports, a meat packing industry that is destroying small cattle ranchers, and lack of protectionism from imports, it would seem cattle prices are headed lower. But against that we face an overwhelming number of technical indicators that seem to say otherwise. Given our allegiance to following sysems we believe to work, we must place our bad news prejudices aside and conclude that cattle prices will go higher. As pork and poultry exports shrink, and competition from chicken and pork help to drive overall meat prices lower, we can only conclude that there is some factor that we missed. Perhaps it is the bad weather in the midwest preventing cows from coming to market and reducing weights. Perhaps it is a penchant of Americans for hamburgers and their increasing attraction overseas in places like China. But whatever it is, cattle prices seem to us to be relatively secure for the foreseeable future, at least based upon what we read in the technicals.
February Live Cattle:
February Live Cattle:
Recent news affecting cattle prices is that Taiwan is still banning U.S. beef imports to that country because of Mad Cow Disease concerns. It was expected to relinquish its restrictions this week, but did not. This brought significant criticism from U.S. officials. Taiwan's lead could spread to other Asian nations and result in banning U.S. beef exports not only to Taiwan, but to all of Asia. Russia cut U.S. poultry and pork import quotas for 2010, increasing duty rates and sending a blow to U.S. livestock farmers and meat exporters attempting to recover from the blow caused by high feed prices and weak global demand. Russia aims to become more self-sufficient in meat production. Russia set its poultry volumes at 600,000 tonnes, down from 750,000 tonnes in 2009. Pork quotas were cut from 100,000 tonnes down to 57,000 tonnes, 57% of a year ago. Russia could decide to expand import qotas if an outbreak of deadly pig disease called African swine fever cuts into its domestic production. For now they hope to knock the price of U.S. pork lower so they can buy at reduced rates. Russia also found high levels of antibiotic residue in U.S. pork imports causing it to ban imports from many U.S. individual plants. Russia is not a member of the World Trade Organization, and there is little the U.S. can do to appeal. Beef imports for 2010 were increased by Russia from 18,500 tonnes to 21,700 tonnes. But the overall situation is deemed negative for beef prices because of fears of protectionism at home that would further antagonise foreign nations. Packer cattle bids were generally below cash cattle for the previous week. Slow weight gains or weight losses in the northern plains and Nebraska could impact supply ahead. Continued poor weather in Nebraska feed yards were supportive for cattle. Beef prices have been coming down despite big snowstorms in the central U.S. and ongoing bitter temperatures. On December 18th, the Cattle on Feed Report showed cattle on feed down 0.6% from a year ago, but this was less than expected. Beef exports were down 4% from a year ago in October. R-Calf USA, a trade organization fighting for the U.S. cattle producer, sent a ltter to the White House describing an "acute crisis" in the cattle industry. The cattle industry represents about $50 billion annually to the U.S. economy, more than any other agricultural commodity including corn. It cited "anti-competitive unprecedented concentration" in the beef packing industry. Small feedlots have been crowded out by larger ones. Tyson, Swift, and Cargill are believed to be forcing smaller producers out of business. Four meat packers slaughter about 88% of all U.S. cattle. The result has been the importation by the U.S. of 2.3 million head of cattle and 2.5 billion pounds of beef in 2008. The end result of all this would eventually be an inability of the U.S. to respond to tight domestic supplies and higher prices, higher unemployment, and greater foreign control of domestic markets. The U.S. in this regard seems almost to be going the exact opposite way of Russia which is aiming to become more self-sufficient.
108.5I R 1/ 6
I CME - Feb-10 Live Cattle, 40000 lbs., c/lb. Cm.=0.08 Lim.= 2.8
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Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for Live Cattle. Therefore, the above chart is taken as giving a buy signal.
We are headed toward a cyclical high whereas seasonals are consider too weak in this time period to be meaningful.
Our best-performing internal program is "Gotthelf." It is giving a buy signal.
Results of "Gotthelf" for Live Cattle (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has triggered a buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $400. Initial margin on a single contract is $1,620. Use of options is advised.
Scale traders are not a factor in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Commercials with the best track record are getting increasingly-short.
The average volatility shown below suggests that a major change in direction to up is imminent at a volatility low point.
Our option trade recommendation is to Sell the Live Cattle April 90 Put @ 2.70 or better.
What the Feb. - Apr. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down. The best time to enter or leave the above spread is when it is at -2.00 or narrower selling the near as prices are falling and then buying the far, and exiting or entering when it is at -4.00 or wider buying the near as prices are rising and then sellling the far.
Here's an intraday chart for the previous day ( 1/05 ).
Risk Versus Opportunity Report
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LCG0 February Live Cattle
High Price: 90.17
Current Price: 85.95
Low Price: 83.87
Risk: 0.048
Opportunity: 0.097
(O/R) Ratio = 2.029
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | + 1 |
| Nirvana Chart | - 1 |
| News | - 1 |
| Point & Figure | + 1 |
| Cyclicals | + 1 |
| Seasonals | 0 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | + 1 |
| Commitment of Traders | - 1 |
| Historic Range | 0 |
| Range/Volatility | + 1 |
| Level Table | + 1 |
| Other Factors | + 1 |
| Total | + 5 |
Place 18 February Live Cattle on a Buy Watch with stoploss @ -2.25 below the get-in point.__________________________________________________________________________________________________________________M.T.
