"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Monday, September 29, 2014

Cattle Bulls Should be Careful

Bulls in the cattle market, (both fats and feeders) have had an excellent run higher for some time. Scarce supplies coming off of back to back drought years ( 2011 and 2102) have reduced the herd significantly. Now that cattlemen are looking to rebuild their herds, on account of the incredibly cheap grain prices and sky high cattle prices, supplies are becoming even tighter as heifers are being held back for breeding purposes. Also, feeders are in hot demand and have drawn record prices at auction barns.

However, it is my view that cattle longs should be careful at this point. The market looks as if it is beginning to accelerate with shorts being "butchered" ( a little word play here for fun ) and now abandoning the ship as the hedge fund longs squeeze them mercilessly.

Markets undergoing this sort of internal dynamic are very dangerous if one is long. Once the last of the weak shorts are run out, they can abruptly change direction. If you are long, I would suggest you think about locking in some profits through the use of some options.

With both hog and chicken numbers ramping up and with US beef so pricey and with a strong US Dollar, the demand side of this market is going to have to deal with some hefty headwinds soon enough. For now, the funds are in the driver's seat but all good things come to an end.

Feeders in particular are in nosebleed territory. They closed limit up on Friday of last week and are currently locked at limit up today. This market in particular is displaying all the classic signs of a blow off run.

I still do not see any technical evidence yet of a top but I am watching very, very closely at this point.

Here is the October live cattle chart. Bulls are banking on the fact that the scarcity of cattle will allow for even higher prices. Bears are of the view that increasing cattle weights and high priced beef will overwhelm demand at these levels. I am in the latter camp but am not ready to pull the trigger just yet.

Some of what we are seeing today in the livestock market is month-end and quarter-end window dressing by funds who are heavily long both markets, as well as the hogs.

That negative Hogs and Pigs Report forced a limit down opening in some of the summer month contracts but funds came in and once again vigorously defended that big long position they have amassed. The hog market has been able to shrug off the report, especially in the nearby October which is being supported by surging pork prices ( end users are switching from high priced beef to pork) but one wonders how long even this month contract will be able to shrug off the broader based commodity selling trend.

I am not going to put too much stock in price action in any commodity market both today and tomorrow due to Quarter end activity; nonetheless, we do want to pay close attention to the price action throughout the rest of the week in these particular markets.

If cattle feeders can force packers to put higher money on the table, hedge fund longs will be able to continue squeezing the shorts. If feedlots blink first, hedge funds are in trouble. We'll see how the battle plays itself out soon enough.

Also, this afternoon we will get another look at harvest progress from the USDA. There is some rain in the forecast for later this week which has spooked some bears ( also a report is due out ) and that is leading to a pop higher in the grain markets this morning.

The Mato Grosso area of Brazil is forecasted to receive some good rains. That will help with overall soil moisture. Planting season is underway down in S. America with traders expecting some big acreage going to beans.

That 6 year low in the Brazilian Real has really gotten my attention.


  1. Thanks Dan.
    There's sooo much about these other markets you discuss that I have NO idea about but I enjoy the discussions anyway.
    I'll try to find out what "fats and feeders" means.
    And fwiw...it seems as though beef prices have finally stabilized in my area and maybe even dropped a bit as TD had mentioned a couple weeks ago.

  2. haven't had to mention south america much in the ags, with prices diving on the huge usa crops.

    everything has been forecast to be superlative in south america ags thus far, with el nino forecast to give more of the same as last year.

    soybean planting has gone in early and well, early beans should hit in january, which could push the final soybean bottom into next year!

    emerging market countries must like their currencies cheapening, but if a contagion hit then gold might have a chance, haha.

    cheerio pip pip!

  3. Dan, we all know the monthly charts are worthless for timing, but if anybody can look at these feeders and say they are not in a parabolic blow off, then I can only say, oh, really? Can not top pick, but only hope for some kind of lower secondary top to sell into I would think. Thanks, good letter.


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