Bulls in the Cattle Pen

Bulls in the Cattle Pen
Nov

17

2017

Bulls in the Cattle Pen

OptionSellers.com Market Alert


A short term bulge of beef inventories has tempered Live Cattle prices as of late. But a squeeze is now visible in the supply chain. And it could be here by January.

At a time when Turkey may be the meat on your mind, you may not want to rule out beef when it comes to your investment plate.

Beef is an interesting commodity in that its price seldom correlates with anything else, not even other agricultural markets. Beef prices live in their own world. The downside to this is that it often takes a specialist to trade the cattle market successfully. This means a lot of cattle traders are industry guys who are notorious for changing their minds based on weekly cut out prices.

The upside to this is that Cattle futures are based almost entirely on the supply and demand of the US market. With a defined production cycle of about 9 months, ebbs and flows in the supply chain can often been seen months in advance. This gives fundamentally based, longer term traders an edge when it comes to trading cattle.

(Side note: William Gallagher makes this point brilliantly in his older but timeless book Winner Take All, which I recommend to any investor wishing to become more familiar with trading commodities fundamentally)

With that in mind, one of those production outflows in market ready cattle working is now working its way to the surface. With an enticing level of implied volatility in live cattle options, a December opportunity to take some high percentage premium off the table may now be emerging.

Cattle Supply Squeeze?

US Live Cattle futures rallied by over 20% from early September through earlier this month. Why? A squeeze in supply is coming and the market is anticipating it.

As a seasonal function, beef production typically declines 200-300 pounds from the first quarter to the first quarter in any given year. Historically, this has often resulted in higher prices into the first quarter of the year. This tendency is illustrated in the seasonal chart below.

GRAPH: Live Cattle 30 year


However, from Q4 2017 to Q1 2018, production is expected to drop by 530 million pounds , the second largest drop on record. Two similar years to this year’s production drop were 2014 and 2003. In those years, cattle prices climbed 15% and 11.8% respectively (taken from this time of year to life of contract highs.)

Strategy

Cattle prices have taken a breather this month, falling by about 8 cents per pound in just the last week.

This is likely the result of profit taking by the bulls and a shorter term supply bulge currently being absorbed into the market.

However, both of those factors should wane into December, and the market’s focus turn back towards Q1 supply shortfalls. Buyers have been distracted this month but should be back in force as the shortages begin to become visible.

We see nothing in today’s Cattle on Feed report that changes that.

We would view additional weakness into December as opportunities for selling June Live Cattle puts for managed portfolios.

Self directed traders can consider selling theJune Live Cattle 1.00 put for premiums of $450-$500 each (a premium that should be available if and when LCM fills the price gap on the chart.)

June Live Cattle

GRAPH:June Live Cattle


Selling the June Live Cattle 1.00 puts.


The current volatility in the cattle options got high enough this month to get on our radar screens. The fundamentals seem supportive of the seasonal. Combined, they might not be enough to put cattle options on your Thanksgiving plate. But they sure look good enough to add to the Christmas menu.

Happy Thanksgiving.

James

For more information on managed option selling accounts with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a FREE Investor Information Pack.

  1. George PrIbyl Says:
    November 26, 2017 at 5:28 pm

    I trade thru schwab street smart central. The lowest strike price I find for LCM is 108.00. What am I missing?

    • Michael Gross Says:
      November 27, 2017 at 3:24 pm

      George,

      I would recommend getting a different platform for trading commodities options. Many platforms, especially those geared towards stocks, only list the closest strikes for a particular commodity (as though it were a stock). I suggest a platform that is geared towards commodities. Consider Interactive Brokers or CQG.

      Regards,
      Michael

  2. Scott Wallace Says:
    November 25, 2017 at 8:15 pm

    Thanks for your thoughts. I do not understand cattle prices and feeders then hogs and all of that. I’ve been waiting for a report in the meat complex.

Share This

Share This

Share this post with your friends!