Cattle Market Commentary 5/30

Many are blaming yesterday’s selloff on the mid-session news drop that China detected traces of ractopamine in beef samples from JBS Greeley.  Ractopamine is a banned substance in China, who announced overnight that they would become more lax with restrictions on beef imports from Australia.   China will do what they are notorious for in the grain markets and that is to use an opportunity like this to let the headline have a negative effect on prices and then step in and buy the product cheaper.  Just my tin foil hat theory but it seems to fit their playbook.   How much they can influence the beef market is open to debate as it was just one plant- time will tell.  Exports are delayed this week until tomorrow given the short week.  Another way to look at headlines is not to try to guess what it will do to the futures board, but to note how quickly these negative headlines are absorbed.  The first bird flu headlines hit the cattle futures considerably more than those of late- that’s a sign of underlying strength.   It reminds me of the knight in that Monty Python movie when he gets his leg cut off and said “it’s just a flesh wound”.  What’s a Flesh wound dollar wise at these prices? A $2 move is smaller than it used to be percentage wise.   Cash will tell the tale this week and has yet to be established but is called steady.

Yesterday’s index reading was 248.68.   I’m attributing yesterday’s selloff to technical chart resistance- the Racto headline was just the fuse.  The August chart is forming a wedge between the September highs and the December lows.  Support is in the $25 area and resistance at $265- I expect ranges to continue in that pattern for the near term.  If you wish to trade around a core position, consider covering short calls against core puts on the low end of that wedge and covering short puts against core, higher strike puts on the high end.  This is a trade recommendation.  It’s basically flipping from a fence to a bear put spread.   That’s more complicated than some care to involve in their risk management strategy and that’s ok as well.  There are a lot of different ways to implement a hedge strategy – find the one that fits your level of experience and risk tolerances the best.  Your broker should help outline those parameters before any trades are placed.   The equity markets are down again today and if the pullback accelerates, I think it will weigh on the entire cattle complex, especially with rich premiums in the back months.