Bull Still Alive and Well in the Cattle Pen
Despite a Bull Market well into it’s Second Year, Option Sellers can keep taking Put Premium into 2015
Supportive Fundamentals for Beef
While the shortfall in beef supplies have taken a back seat in the headlines, the bull market is alive and well in the Live Cattle market.
Smaller markets like live cattle can often be overlooked by “big time” commodities traders focusing on more glamorous markets such as oil and gold. But these quiet little backwaters of the market can be solid moneymakers for astute option sellers that know how to read fundamentals.
Beef prices have been in a raging bull market since mid 2013 as a result of a substantial shrinking of the US Cattle herd. 2013 saw a 50 year low in the calf crop. This not only means less cattle for slaughter, it means less new animals for breeding pens. Unlike plant commodities such as corn or soybeans, a calf crop cannot simply “bounce back” the next year by planting more. Cattle on feed numbers tend to recover gradually as more newer animals make their way into breeding pens.
While young cattle placed on feed bounced a bit in 2014, it will be at least another 6-10 months before enough new animals enter the pipeline to significantly alter the supply picture. The USDA sees beef production dropping 2.3% again in 2015 – which should help feed this bull market
In addition, demand remains brisk for beef both in the US and overseas. As we enter the holiday season, beef demand tends to increase as consumers tend to dine out more, host and attend holiday parties and thus become more likely to “splurge” on more expensive cuts.
At this same time, feeder and live cattle weights tend to come in lighter as it becomes harder to put weight on young animals during the cold weather.
With the trend as your friend, demand strong and supplies looking shaky again in 2015, we feel it to be a likelihood that higher prices will continue – or at very least, not see a substantial reversal.
With the market technically due for correction, we would see any 3-5 day sell offs as opportunities for selling puts. February puts are attractively priced and should offer good premiums on a pull back.
Figure 1: Energy Information Agency Natural Gas Storage Levels
Fundamentals continue to favor the uptrend in Live Cattle prices. Option Sellers can look to take put premium this month on pullbacks
We will be looking for opportunities for taking premium out of this market over the next 2-4 weeks in our managed portfolios.
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