Cattle Futures Leap Due to Short Supplies

Live cattle futures are up about 2% today. I expected this! I don't think today's gap higher is going to be the end of this, either. Cattle futures, and beef prices, are bound to go significantly higher. Cattle herds are the smallest since 1952, so this was expected!

Cattle Collapse

CHICAGO, Jan 17 (Reuters) - Chicago Mercantile Exchange live
cattle futures fell hard Thursday on news that Cargill Inc
 plans to close its beef packing plant in Plainview,
Texas, on Feb. 1 due to tight supplies, traders and analysts
said.
    CME live cattle futures at one point fell by their 3-cent
daily price limit, but recovered some of those losses later in
the session.
    "The U.S. cattle herd is at its lowest level since 1952.
Increased feed costs resulting from the prolonged drought,
combined with herd liquidations by cattle ranchers, are severely
and adversely contributing to the challenging business
conditions we face as an industry," John Keating, president of
Cargill Beef, said in a statement. 

Ag Commodities Blasting Higher Again

Beef -- near limit up three days in a row

Pork

Sugar

Livestock Futures (Near) Limit Down

Feeder cattle was limit down, and live cattle was nearly limit down. Lean hog was near limit down. I don't think I've ever seen this occur before!

Feeder cattle

Live cattle

Lean Hog

Daily chart for live cattle

Ag Commodity Inflation Is Here and Going to Get Worse

from Along the Watchtower blog:

Longtime readers will recall that we've had several conversations here regarding the impact that the Fed's quantitative easing policy is having on the costs of everyday food items. Soaring prices of agricultural commodities are going to continue to have a devastating effect on the purchasing power of average Americans and consumers around the globe. Since prices have now recovered some from the selloffs after the Japanese earthquake and tsunami and since there is no end in sight to QE, I thought it was time to once again take a look at out favorite commodities and assess where their prices may be headed over the spring and summer.

Let's start with the grains because rising grain prices cause all sorts of inflation. Not only are grains the raw input to countless consumer goods, grains are also the primary foodstuff for cattle ranchers and hog finishers as they prepare their herds for slaughter. Let's start with wheat, which is being influenced not just by the falling dollar. Price is also feeling the impact of the ongoing drought in the "winter wheat zone" of the high plains of Kansas, Oklahoma and Texas.
http://www.bloomberg.com/news/2011-03-24/worst-texas-drought-in-44-years-eroding-wheat-beef-supply-as-food-rallies.html
Now take a look at the chart. Long-term support held at $7.50 and wheat looks almost certain to catapult higher very soon.

OK, so how about corn? Corn is extremely important in food production as it is used not only as a primary ingredient but as a sweetener, as well. First, let's look at the chart. Support was found, as expected in the area around $6.50. I have no doubt that corn will soon resume its upward move along its primary trendline from last summer.

Now here's the deal with corn...it's expensive to grow! The primary fertilizer that Midwestern corn farmers utilize is anhydrous ammonia. Last year, anhydrous ammonia cost your average farmer about $425/ton. This year, the cost has almost doubled to $750-800/ton. So, while it might be tempting to seed a lot of acres with corn to capitalize on the high price, the input and production costs are so high that many farmers will choose to plant soybeans, instead. Less acres of corn planted lead directly to less production. Less production leads directly to even higher prices. (Remember that below when we get to cattle.)

So what about soybeans? Soybeans are the one grain that I don't expect to rise in price. They will, most likely, stay rangebound through the summer. Why? Besides the fertilizer costs affecting plantings, soybeans get extra acreage for another reason: Weather. Because soybeans have a shorter growing season, they are a "fall back plan" for many farmers who struggled to get corn planted due to overly wet spring conditions.
http://www.galesburg.com/news/x1777821638/Galesburgs-spring-outlook-cool-and-wet
If the upper Midwest spring turns out cool and wet, many farmers will forego corn planting and turn, instead, to soybeans. Extra supply = Lower cost.

Now, let's get back to corn. Have you ever heard the term "corn-fed beef"? Most of the best steakhouses proudly champion corn-fed beef because, frankly, its tastes a helluva lot better than grass-fed. The high sugar content of the corn gets converted into fat. The fat makes its way into the muscle and you, Mr. Steakeater, get yourself a beautiful, marbled "prime" steak. Fat cows are also desirable at slaughter because, well, they weigh more and cattle are sold by the pound. OK, so now, pretend for a moment that you're a cattle rancher. As your cattle are growing and being prepared for market (the term is "finished"), you want to feed them as much corn as they'll eat and you can afford. Corn at $7.00/bushel really cramps your business plan. Your first reaction is to control costs by thinning your herd, i.e. you sell some prematurely, before they are "finished". You might also simply want to sell some of your herd to take advantage of today's high prices.
http://www.saljournal.com/news/story/Cattle-prices-32411
Either way, this extra supply in the short term has actually worked to keep cattle prices from soaring at the same rate as the grains. But this is temporary. By this summer, supply will decrease as cattle that would have been coming to market just then have already been slaughtered. Are we already beginning to see this play out on the chart? Well, take a look:

Many of the same dynamics are in play in the pig market. Note the similar chart pattern of a recent breakout to new highs.

So what does all this mean? It means you'd better prepare. Maybe you're comfortable and you have all the disposable income you need. Great, but what about your sister, trying to raise her three kids on 50 grand a year? What about your neighbor or your best friend who is trying simply to make ends meet after losing a job? What can you do to help them?

You start by warning them about the coming surge in food costs brought about by quantitative easing. All of the factors discussed above, combined with soaring fuel costs, will most certainly lead to a much higher "cost of living" in the near future. The time to act is now.

Cattle Futures Prices Finally Capture the Attention of the News Media

Cattle prices are soaring toward records, pushing up the cost of beef in grocery stores and adding to the risk of a broader wave of food inflation.
The gains are being fueled by rising appetites globally and a dwindling U.S. herd. Purchases of U.S. beef around the world have surged as emerging economies become more prosperous. At the same time, ranchers hit in recent years by drought and the financial crisis have cut the number of cattle to the lowest level in decades.
The rally has driven up the futures market for cattle by 11% since early July

Beef Becoming the Food of Kings Because Only They Can Afford It!

Cattle futures have risen significantly during 2010. Every time I get the idea that prices may be close to a top, they go even higher. One news report a few weeks ago indicated that US cattle herds are the smallest since 1963! I haven't eaten a steak in years!

Live Cattle -- Limit Up Bull!

Limit up on live cattle today, with feeder cattle almost the same.

from Dow Jones:

CHICAGO (Dow Jones)--Chicago Mercantile Exchange live cattle closed sharply higher Monday, and August settled limit up, on fund-buying, short-covering and buy stops.

Feeder cattle also wound up sharply higher. July-through-October hogs ended higher, but other months finished mostly lower. And pork bellies settled sharply lower with February limit down.

Live cattle opened firm on underlying technical support and shorts that covered previously held positions. Last week's steady cash-cattle sales and positive beef-packer margins spurred talk that fed-cattle prices would be no worse than steady this week.

Cash-basis cattle last week fetched mostly $82 per hundredweight, which was comparable to the prior week's sales.

Spot-June, which will expire on Tuesday, made further headway after it set off buy stops on the way to a two-month top. Nearby-August peaked at an April 16 high soon after it broke through the 100-day moving average barrier.

Traders are now left wondering whether cash-cattle negotiations will keep pace with Monday's steep climb or fall victim to a possible downward adjustment on Tuesday.

Bearish players say Monday's run-up was nothing more than "window dressing" before the last trading day of the quarter on Tuesday.

Live Cattle Limit Up!

More commodity prices that rocketed higher today:

Where's the Beef?

Some readers may recall that last spring, I warned that later this year, livestock prices would rise because ranchers had reduced their herds. This phenomenon appears to be occurring now. This wasn't really a prediction, but rather, a natural consequence of smaller herds and higher feed prices. 1+1 =2! Smaller supplies were likely to lead to higher prices eventually. Now, although feed prices have dropped by 50-60%, the smaller herds are likely to lead to higher meat prices.

"Cattle prices rose for the second time in two days on signs that the shrinking U.S. herd may limit beef supplies next year. Hog futures declined."

Here is the Bloomberg article.

Transitioning To Longer-Term Trades

I am in the process of transitioning to longer-term trades. This may permit me to spend more time during the day studying markets and, yes, blogging. I am also considering the possibility of starting a futures brokerage with a fellow futures trader who is an experienced broker. He trades on fundamentals and I trade on technicals, so it could be a complimentary relationship, both for me professionally and our clients.

With longer-term trades, I will be able to take more positions in different commodities and futures, including the softs, oats and rough rice, livestock (meats), interest rate futures (Eurodollars, swaps, fed funds, Euroyen Tibor) etc. This will be a way of not only spending less time trading, but also spreading and diversifying my risk.