Tag Archives: feeder cattle

Weekly Commodity Strategy Review

It’s been an exceptionally confusing week to trade on a discretionary basis. Rarely can I recall a time when the markets have been more unsure of their next move. Fairly well every financial market has LOUD voices on both sides making good cases for their positions and their market forecasts. Between the FOMC meeting and the constant worry about whether or not or, when Greece will default has made picking a side based on theory and economics all but impossible. Despite this, we managed to remain fairly unscathed trading feeder cattle, Eurodollar and 30yr Treasury Bond futures; even a bit profitable.

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Weekly Commodity Strategy Review

This week we looked at Crude oil for TraderPlanet.com and Feeder Cattle for Equities.com while our own research focused on the building a top in the stock market.

We’ve also posted a snapshot of the mechanical program’s soybean meal results. This program is based on the commercial traders’ actions as reported to the Commodity Futures Trading Commission’s(CFTC) weekly Commitment of Traders(COT) report.

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Feeder Cattle Prices to Weaken

The cattle market finally made a meaningful and perhaps lasting, high late last year. The market has pulled back to bottom and base approximately 20% off last year’s highs. March’s rally in the cattle market was easy to forecast based on the dominance of commercial trader buying as the market pulled back in January and February. You can see the February and March Commitment of Traders (COT) buy signals on the included chart. Now that we’re up to speed, it appears that this rally is losing its fundamental support ahead of some seasonal weakness.

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Hogs and Cattle Bottoming Out

There are three markets in the meat futures sector with enough volume and liquidity to attract both hedging and speculative activity. These are the lean hog futures along with the feeder and live cattle markets. The live cattle market is best thought of as cattle on the farm while feeders are the cattle that have made the journey from the farm to the feedlot for fattening prior to slaughter. We’ve written extensively on the broad nature of global supply and demand fundamentals within these markets and included links to our previous research at the end. This week, however, these three markets appear to be setting up for a classic trading opportunity.

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Trading the 2015 Cattle Market

The live cattle market was up 28% in 2014 and the Feeder cattle market was up 32% for the year. The cattle markets made all-time highs in 2014 as the U.S. had its smallest slaughter in 20 years. This came as no surprise as we’ve discussed the declining trend in the domestic herd several times. Based on the cheap feed prices, cheap fuel costs and a strong Dollar, this should be another year of declining supply as the U.S. begins to grow its herd to meet the growing foreign demand.

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Beginning of a Cattle Top

The cattle market has reached new highs repeatedly this month. We’ve known for years that the U.S. cattle herd has been steadily declining. It currently stands around 89 million head, which is the lowest it’s been since 1952. This hasn’t mattered much as the decades long decline in US beef consumption has wilted domestic demand.  Furthermore, the impact of modern animal husbandry techniques have significantly increased the final weight of the cattle that hit the
slaughterhouses, thus supplying the market with more total beef on fewer total animals killed. All of this bearish information begs the question, “Why are cattle prices so high and where do we go from here?”

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Profitability vs. Responsibility in the Cattle Market

We’ve discussed at length the balance between feeding a growing population in a world of declining resources. These discussions have been primarily focused on the grain markets and the enhanced yields of genetically modified organisms (GMO) versus any applicable health and environmental risks. This week, we’ll focus on a major development within the cattle industry as it tries to balance concern for public and animal well being against the dual mandate of feeding the world while generating some profit.

Tyson Foods unexpectedly announced that they were going to stop buying cattle from feedlots that use Zilmax on August 7th. Zilmax is the brand name of Merck’s beta-agonist feed supplement. The FDA originally approved beta-agonists for the treatment of asthma in humans. One of the noted side effects during the drug’s development was consistently muscular weight gain in treated mice. Merck used this as an opportunity to expand their animal care services and received FDA approval of Zilmax in 2006 for use in cattle. The entire beta-agonist family has received various approvals as a feed additive since 1999.

There is no doubt that cattle fed beta-agonists gain weight quickly. The cattle production cycle typically sends cattle to feed lots for, “finishing” before being sent to slaughter or, “processing” in today’s politically, correct terminology. This is where feed additives come into play and the final pounds are added on. Kansas State has a widely respected animal husbandry division and their published research clearly shows that feedlot animals have grown much larger and more quickly than they have in the past. Cattle are gaining more weight per day than ever and are spending less time on the feedlots. The feedlots, in turn are sending heavier animals to slaughter. The result is that the U.S. is producing nearly 20% more meat from nearly 20% fewer animals.

Tyson’s concern is based on the health of the animals being delivered to their processing facilities. We all remember the video clips on the news during the mad cow scare. These included disturbing images of animals unable to walk or shaking with tremors. That is a neurological disorder. The current issue is strictly physiological. Animals are becoming so large, so quickly that their bodies are shutting down as they try to support the dramatically rapid increase in mass. Dr. Bryan McMurry states that cattle now average 1,350 pounds and have gained 300 pounds over the last 30 years. His primary concern is that 1,350 pounds is now the average, which means over half the animals are larger and the first standard deviation places 16% of the animals above 1,500 pounds. His analysis shows that these animals aren’t even able to reproduce effectively through lower calf weights and lighter weaning weights. The animals simply require too much of their bodies effort to sustain themselves and therefore don’t have enough in reserve to foster healthy calves.

Our society is constantly debating the battles between science and morality. We’ve grown faster technologically than we have ethically. Revenues drive research. Morality is not a revenue producer. Tyson’s announcement that they will not accept Zilmax fed cattle after September 6th is a major statement considering they control 25% of the meat industry.  However, they are a publically traded company and need to continue turning a profit. Therefore, they will still accept animals fed Ractopamine and Optaflexx made by Eli Lilly. Neither of these compounds has been as effective as Zilmax, which has been banned in over 100 countries but both are better financial alternatives to longer finishing times and lower weights.

The financial implications on the cattle futures market have been a chaotic glimpse into the dichotomy of public speculative action versus the cooler heads of commercial traders. Initially, the market rocketed to limit up. Speculative buying on the idea that the largest packer in the U.S. would have to buy more cattle at lighter weights going forward fueled this. The secondary reaction brought the market back to unchanged and lower as it digested the fact that there will be an initial glut of cattle coming to market to beat the September 6th deadline. Commercial traders meanwhile have been light buyers over the last week. I felt the important thing was to wait on commercial reaction to the news. This meant I had to wait for this week’s Commitment of Traders report.

The math behind lighter cattle means that another 90 million bushels of corn will have to be dedicated towards animal feed rather than ethanol or other crops or development land. We will also need to add about 10 million more cattle to the production chain to make up for lighter weights. That represents an increase of more than 10%. The balancing act comes down to the environmental strains of producing another 10 million animals and growing another 90 million bushels of corn against as well as higher processing costs at the slaughterhouses and extra finishing time at the feedlots versus profitability. This will lead to higher prices down the road in spite of a short-term glut of animals coming to market.