02-01-2019: April LIve Cattle: Record Cold in Plains States Brings Record Prices

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

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Introduction

It's all about the weather in determining live cattle prices. Record cold in midwestern and northern states has caused problems at feedlots so great as to restrict marketing efforts. While slaughter numbers seem relatively high, cattle exist under intolerable conditions in freezing weather. In efforts to move backlogs of inventory, dispose of "muddy cows", fight off transportation and utility outages, and sick and underweight cows, prices would hopefully moderate, but such is not the case. There simply is a slowdown in production with less meat reaching the end-user/consumer. Historically, live cattle prices are near all time highs by a margin of at least 30% over previous record prices. This has been such a great move as to cause analysts to call it a "bubble" and analyze the weather-based situation as vulnerable to a return to more normal temperatures which seems inevitable. The dependence of short-term trader enthusiasm upon short-term weather conditions would suggest to us the "news" is negative for prices. However the situation is sufficient confused with the recent lousy Trump shutdown obscuring information on both Commitment of Traders and recent USDA very important agricultural statistics reports, that even technicals suggest we need to overweight recent news to break a tie for sell versus buy indicators in favor of sell.


Intermarket Analysis

We fed Live Cattle, Feeder Cattle, and Milk into a neural network to get the following result:




Parabolic Chart

April LIve Cattle:

Parabolic Chart


Nirvana Chart

April LIve Cattle:

Initial Chart


News Analysis

Record cold weather in the Midwest and seeping into the Plains states provides short-term support as traders continue to see poor feedlot conditions and slow weight gains. Cattle in the northern and eastern Plains states are seeing stress with the cold weather blast. Actual production for January is coming in well below expectations, however some analysts think this situation could swing back the other way once the cold weather passes. A burdensome net long position in live cattle may be building that would suffer liquidation on a recovery to more normal prices. An upcoming (as of this writing) Cattle on Feed Report is anticipated to show placements up 1.2% over last year, and marketings near unchanged. January "On-Feed Supply" is anticipated to show 2.2% above last year. The market posted a new contract high as traders are convinced that cold weather will disrupt the supply flow and help to support higher cash markets ahead. USDA boved beef prices were rising to a recent value of $218.13, up from $216.34 the prior week and the highest beef market since November 7th. The USDA estimated cattle slaughter for the mocst recent week is around 237,000 head, up from 235,000 last week at this time and up from 234,000 a year ago. Feeder cattle prices are also showing strength. These price trends are not matched by pork, which now may be oversold.

Interpreting the effect of cold weather in the North on cattle for both short term and longer term effects is difficult. Mud will go away as the pens dry, but severe cold takes a stoll that will be felt into the summer. Thanks to the Government shutdown, the Cattle on Feed Report has been delayed and leaves missing data links along with the year end inventory report from the USDA.

Volmes of sales increased over the prior to weeks leaving packers with more inventory. It left cattle owners with smaller show lists. Packers also increased purchases for the 15 to 30 day period during an extremely advantageous basis for the purchases.

While cattle futures prices were modestly higher during the past week or so, cash cattle was $1 lower for live cattle and steady dressed. Most of the live sales are muddy cattle in the midwest. Clearn cattle in Texas are purchased at over top prices to protect the price from public disclosure and leave formula cattle with a low base price based upon muddy cattle. Formula cattle account for about 58% of the total live cattle market, with 32% are negotiated with "others" accounting for the rest.

Carcass weights are a closely watched barometer, now unavailable because of the Governmenet shutdown.

Imports of beef continue to exceed a year ago and exports are failing to maintain growth over last year. Trade policies have had a large impact on both imports and exports as political negotiations heat up. This is yet another negative influence for farmers produced by our incompentent executive branch of the Government.

A south Texas beef packer Sam Kane was shut down by the City of Corpus Christi last week following improper water discharges from the plant. This precipitated a Chapter 11 bankruptcy filing. The receiver is suggesting a quick reopening. Unpaid sellers of cattle to Sam Kane will attempt to collect from Kane receivables under the Packers Trust after a hearing on February 8th.

Analysts say reliance upon USDA numbers has been problematic but no numbers is wose. Reports normally released on January 1st have an uncertain release date that could impact the market. The impact of winter weatther started in December, but December placements continued at what some think is a record pace, surpassing 2017's large number and posting what many think will be the largest number in over 10 years. In January, with worsening weather impacts, a slowdown in placements was witnessed because of difficulties that ranged from electrical outages to frozen equipment to wet and sick cattle. Cattle owners suffered lost weight on cattle on feed. Much of the price of beef is controlled by beef demand. Animals impacted by weather will require extra time to reach acceptable marketing weight. Slaughter numbers in January rising will be interpreted as attempting to dispatch muddy cattle and reduce backing up in the nation's feed yards of increasing inventory.

One report shows a current breakeven projection for a 750 lb. steer as $142.45 per hundredweight, and a current close out at $144.00.

Some Canadian cattle producers are being allowed to defer chunks of income from sales in the 2018 tax year, especially in certain western provinces. Low moisture levels resulted in significant forage shortages for livestock producers in affected areas. One option is for producers to reduce their breeding herd to better manage feed supplies the government said, and the deferral provision allows them to help "replenish the herd." The cost of replacing animals in 2019 will offset the deferred income, reducing the ax burden associated with the original sale. To defer income, a breeding herd must have been reduced by at least 15%. If the herd is reduced by 30% or more, 90% of the income from net sales can be deferred.

Livestock owners will be boosting the amount of feed they give their animals to ensure they keep weight on during the cold snap, cutting into already thin margins. Any hope for improved exports continues to await U.S. and China trade talks. Uncertainty there has contrbuted to keep futures prices in check from further rising.

There is some evidence that the Commodity Futures Trading Commission is delaying and keeping a lid on the release of Commitment of Traders data after the shutdown to avoid a large instant reaction to the numbers when they do come out, possibly on February 1st.

"Live cattle" are cattle which have attained a desirable weight of 850 - 1,000 lbs. for heifers and 1,000- 1,200 lbs. for steers, to be sold to a paciker. The packer then slaughters the cattle and selss the meat in carcass boxed form.

While the U.S. struggles with trade talks, Brazil has deepend its trade relations with Malaysia by agreeing to send a significant amount of live cattle to Malaysia. 80% of beef consumed in Malaysia comes from outside of the country. Brazil is now working on deepending trade relations and export deals also with Saudi Arabia and Chile.

As weather dominates the current live cattle futures price rise, and everyone knows the weather will get warmer, there are enough progosticators on the Internet who see the current situation as a "bubble" that is soon to burst, so we rate the overall news as negative for prices.


Point & Figure Chart

142.0|                                                                  T  1/29
     | CME - Apr-19 Live Cattle, 40000 lbs., c/lb. Cm.=0.08  Lim.= 3.6
     |
     |
     |
137.0|_________________________________________________________________________
     |
     |                X
     |                XO
     |                XO  X
132.0|________________XO__XO__________X________________________________________
     |                XO  XO          XO
     |                XO  XO          XO
     |                XO  XO          XO
     |                XO  XO          XO
127.0|________________XOX_XO__________XO_______________________________________
     |                XOXOXO          XO                X
     |                XOXOXO          XO  X             X
     |                XOXOXOX         XO  XO            X
     |                XO O OXOX     X XO  XO          X X
122.0|________________X____OXOXO____XOXO__XO__________XOX______________________
     |                X    OXOXO  X XOXO  XO          XOX
     |                X    O OXO  XOXO OX XO        X XOX
     |                X      O O  XOX  OXOXO        XOXO
     |                X        O  XO   OXOXO        XOX
117.0|________________X________O__X____O_OXO______X_XOX________________________
     |                X        OX X      OXO    X XOXO
     |                X        OXOX      O OX X XOXOX
     |              X X        OXOX        OXOXOXOXOX
     |              XOX        OXO         OXOXOXOXO
112.0|______________XOX________O___________OXOXOXO_____________________________
     |            X XO                     OXOXOX
     |            XOX                      OXOXO
     |            XOX                       XOX
     |            XOX                       XO
107.0|____________XOX______________________O___________________________________
     |    X       XOX
     |    XO      XO
     |X   XO      X
     |XO  XO      X
102.0|XOX_XO______X____________________________________________________________
     |XOXOXO      X
     |XOXOXO      X
     |XO OXOX X   X
     |   O OXOXO  X
 97.0|_____OXOXO__X____________________________________________________________
     |     O OXO  X
     |       OXOX X
     |       OXOXOX
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 92.0|_______O_OXO_____________________________________________________________
     |         OX
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 87.0|_________________________________________________________________________
     |
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 82.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
                111                 1111               11
      677778899901112445555666778899000111124556666778912
      201221300220132010112022122302012000120121122111100
      154158119717101405256768248076984728764434559163055
The above chart is giving a conventional buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "Project". It is giving a sell signal.

Internal Printout 1

Results of "Project" for Live Cattle (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $400. Initial margin on a single contract is $1,650. Use of options is advised.


Historic Range

Scale trade sellers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

The Trump shutdown so badly disrupted the CFTC that the Commitment of Traders report publishing schedule will not be re-established until the "normal" date for the first March publication. All data until then will be stale.

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent at a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Live Cattle August 116 Call and Sell (1) Live Cattle June 116 Call @ 1.715 to the sell side or better.


o 1 o 2 o 5


o 3


o 4


Calendar Spread

What the Apr. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at 7.60 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at 10.00 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be at the buy the far, sell the near point.





Level Table:

Level Table

The path of least resistance is up.
130.0|                                                                  R  1/29
 CME - Apr-19 Live Cattle, 40000 lbs., c/lb. Cm.=0.08  Lim.= 3.6
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     |ABCCCCCCCCCDQSSSSTUUVVVWWWW
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120.0|CCCCCCDNNNQQQUUUUUUVVVV__________________________________________________
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     |CCCDDDMMMMNNNNNNOOOOOPPQQQQQUUUUVVV
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105.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.171
                                         1 1 1 1 1 1 1                
       2 2 3 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 0 1 1 2 2 1 1           1
       0 1 0 1 2 1 2 1 2 1 2 1 2 0 2 0 1 0 1 3 1 2 1 2 1 2           2
       1 4 1 5 9 3 7 1 5 1 5 0 4 7 1 5 9 3 7 1 4 9 3 8 4 8           9


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day (1/30).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                     LEJ9    April Live Cattle

                      High Price:  129.78
                   Current Price:  127.8
                       Low Price:  123.82

                            Risk: -0.031
                     Opportunity: -0.063

                    (O/R) Ratio =  2.010


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart + 1
Nirvana Chart + 1
News - 2
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Historic Range - 1
Commitment of Traders + 1
Range/Volatility - 1
Level Table + 1
Other Factors + 1
Total - 1
Place 9 April Livec Cattle on a Sell Watch with stoploss @ +2.90 above the get-in point when recent price is represented as "127.80".
____________________________________________________________________________________________________________________________________________M.T.