September 17, 2009
By:  Matthew Bradbard

A number of commodities have seen significant bullish moves in the recent weeks to months, cattle has not. As you can see by the chart below live cattle has been stuck in about a nickel trading range for much of 09’. Let me begin by telling you a little about the live cattle market, the contract size is 40,000 lbs and this contract trades on the CME. Every penny move in live cattle represents a $400 change in the contract value per position. For instance a move from 86.00 to 87.00 would represent a $400 move per futures contract. Other notables are the current margin is just under $1100 and the daily trading limit is 3 cents. This commodity is traded electronically as well as through open outcry; the pit hours are 9:05 AM – 1:00 PM (CT).

Pay close attention to the Cattle on Feed report out Friday 9/18 after the close.

We believe that because of the high input costs, i.e. feed, fuel, land and the overall lack of profitability, a number of cattleman have left the business. If and when demand comes back into the market for beef, the lack of supply could ignite a bull market that could last for quarters if not years. In regards to the current market we have seen ideal weather so cattle have been coming into the feed lots heavier than normal. Typically cattle weigh 500 lbs. when they come into the feed lots, but of late average weights have been closer to 800 lbs. By the time cattle are ready for slaughter weights have been closer to 1400 lbs. as opposed to the norm of 1200 lbs. That being said these conditions have caused some downside pressure as heavier cattle have been forced into the market (more supply).  We think these circumstances are temporary and have started positioning our client’s long cattle contracts out till the end of this year and early next year.

The USDA Cattle on Feed report is a monthly publication that reports on the number of cattle in US feedlots, the number of cattle being placed on US feedlots, and the number of cattle marked for slaughter. With this report analyst, traders and industry firms can estimate current and future cattle supplies. As you learn to digest these numbers it can be a useful tool in forecasting commercial beef production and pricing.  This report is typically a market mover so packers, processors, hedgers and speculators will pay close attention. Our prediction for tomorrow’s report: Placements - average range 97-103%, we anticipate a number under 100 which should be viewed as bullish. This would be the lowest August Placement in numbers since 95’. Last month’s number at 114 was massive but as opposed to a trend we feel it was a fluke. Marketings – average range 93-96%, we anticipate right around 96. On Feed – average range 97-100, we are looking for 98.5.

In terms of trading ideas we like being long December live cattle with at the money puts for protection, long February call spreads or in a calendar spread long February against a short in April. Ultimately we expect prices in Live cattle to get moving north between now and year’s end looking for prices to be 5-8 cents higher by the end of the Q1 10’.

Live Cattle over the last 12 months

Cattle prices are prone to seasonal tendencies as well as cyclical forces as the herd populations typically expand and contract in response to production costs and farming operation’s profit margins. If you are interested in learning more about how to trade cattle or some other of MB Wealth’s trading ideas please do not hesitate to contact us. While it is not a necessity to be an expert on cattle we believe knowledge is power and it helps to know when you are making or losing money HOW and WHY?

For detailed strategies contact us via e-mail www.mbwealth.com or telephone at (888) 920-9997 / 954-929-9997. For the most part investors reading this analysis want to be more hands on, however we suggest taking a look at our managed futures section and consider diversifying further via CTA’s with proven track records:   MB Wealth Managed Futures

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.