Live Cattle - Looking For A 5% Drop

Includes: COW, DBA, LSTK, UBC
by: Matthew Bradbard


Beef prices just off record highs.

A 5% correction in live cattle prices forecasted.

What goes up must come down.

The cattle market has been overbought for the last week with futures currently trading 2.4% off recent highs made 7/28. The discount of futures to cash of late and the outlook for tight supplies in the future should keep the market bid longer term, but this does not mean we cannot get a price correction short term. Outside markets, such as weakness in the hog market and a correction in the equity markets could cause spillover weakness. There have been no significant fundamental changes, but perceived demand concerns might contribute to selling pressure and a 5% correction is what I am targeting. October live cattle did close near a $6.40 discount to the cash markets as compared with the 5-year average, showing a premium of $6.40 to cash. With cash prices in Texas and Nebraska seen above even the recent highs in futures, we currently do not see a substantial number of traders wanting to sell near $155/$156, but what if cash prices falter and trade sub-$160? Daily stochastics are rolling over from overbought levels and futures have lost ground 3 out of the last 5 sessions. Near-term support in October is seen at $154, followed by $150, then $148.

Year to date, October live cattle futures have been on a one-way train, appreciating high/low 22.6%, lifting prices to their highest level in history just 9 days ago. Picking tops is a fool's game and while I am not convinced the bull market in heifers is over, I am forecasting a correction at this time. Futures are currently challenging their 20-day MA (dark blue line) and on a settlement under that pivot point, an interim top would be confirmed in my eyes. I anticipate 5% depreciation in prices with an objective at $148 in October futures. This is a 40,000 lb. contract, so a move from current trade would represent a move of approximately $3,200 per futures contract. Obviously, one could opt to take advantage of this trade via futures or options. A trend line that has been in place since the Spring and 38.2% Fibonacci retracement both come in at this level. Assuming we get the move lower in the coming weeks, that would serve as my exit door.

Live cattle daily chart:


I would be remiss in putting out this piece without talking about food inflation. Anyone that has gone to the supermarket in recent months should be aware that food prices are on the rise. As of May 2014, food price inflation was running at 2.46% (year-over-year) and possibly heading to 4% by late 2014 or early 2015 (see below). It is comical to me that the Fed prefers to target core inflation and strips out food and energy because we consume food and energy, and their price appreciation affects us on a daily basis. Their logic is by not factoring volatile food and energy prices, it lessens the chance of a head-fake in the data. Of course, if we see a rise in core inflation alongside food inflation, the Fed may take this into consideration and look to make a move sooner rather than later. Current market expectations are predicting a potential rate move as early as the March meeting.

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the financial products herein named. Trading futures, options and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.