This week's price action ended on a positive note for bulls with June fats finishing up $3.05 and Aug feeders up $2.60.  After a choppy trade this week and what looked like a lot of indecision among traders, new contract highs were made across the board today, supported by the boxed beef trade which was up 16.29 in 5 days.  Yesterday and today's choices were down slightly the last 2 days, but still posted solid gains for the week and still holding above $3.40.  Packers were short bought and cash cattle trade this week was on fire with IA/MN/NE trading $222-$224, Kansas trading $215-$218 and TX/OK/NM trading $218.  I heard $226 was paid by a regional in Nebraska.  Open Interest was wavering early week but increased as the week progressed and confirmed that new longs entered the market.  It makes sense that new interest is here-Bloomberg did a piece on it, and it's on everybody's radar.  How long this will last is anyone's guess at this point and although I believe it is not sustainable unless boxes graduate to higher levels, new contract highs are hard to discount.  Probably the most supportive factor in my opinion is the basis spread to the June contract.  Cash trading at those levels compared to June futures at $211.42 is a wide spread which gets wider with each month out.  Weekly exports were relatively good at 12,900 MT (up 6% from last week) and fears of losing our export markets due to tariffs have abated for the moment.  Equities rallied today after a strong jobs report with non-farm payrolls for April coming in at 177k vs 133k expected.  July corn finished the week down 16 ½ cents, July wheat down 2 cents and beans down 1¼ cents.

One should ask what can stop this cattle futures market and what price action will it take for the charts to look like a top has finally been put in?  Bull markets often end with an epic short squeeze and a lower close.  No sign of that yet.  A big down day in boxes or cash trade would look suspicious, but that hasn't happened yet either. .  The health of the US consumer appears fine at first glance but all-time credit card debt caused by inflation and reckless spending habits are starting to show cracks.  So how long can robust demand last?  That's a tough one but it will end and the reversal will take a lot of people of guard.  We sometimes forget that a 20% correction in $297 feeders is still over $59.  So how do we manage risk at all-time highs?  In this scenario, I like near the money long put options or bear put spreads because of the flexibility both can give producers while keeping the top side open.  This is a trade recommendation. 

Making marketing decisions can be hard in these environments.  As managers of risk, we see a lot of commonalities through these cycles.  Hindsight is 20/20 and if producers' market too early, they leave a lot on the table.  This often leads to becoming lax with the next round of marketing which leads to being reinforced for doing so while the market is going up.   Sorry for my novice attempt at clinical analysis, I was not a psychology major but by wife works in the behavioral health field so I hear these terms often- take it at face value.  I think it's important to mention in this case though, because this approach works until it doesn't.  Markets reverse fast and after a limit down day, people rush in and usually at that point volatility premiums of options have already increased substantially.  There are many ways to approach risk management in the futures markets.  Averaging into positions is a way to take out some of the guess work.  I encourage producers to see what is out there and find what works best for them and their specific situation. Get with your broker and understand the risk/reward parameters before placing any orders.  The information is out there and the CME website is a great place to start learning.    

Written by Chris Winward

“This is intended to be or is in the nature of a solicitation.”  Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.