It was an eerily slow start to cattle futures trading this morning.
Without cash having moved lower by midday, the tensity of the basis is perceived keeping traders from wanting to press the issue too far. Even if the bears happen to be correct, they are all aware of the potential for a basis-closing rally, were the cash to not decline as most anticipate, or at least to the extent expected.
I know of no other way to participate in this market other than to trade the basis. The best way I know to do that, is watch the cash. If cash does not decline to the extent of anticipated levels, I expect the basis will be narrowed by futures trading higher.
Feedyards appear to have a good handle on weight control. Packers may be attempting to sing a different song, but yards appear to like the tune being played. Nonetheless, bears are not in the driver's seat at such a discount. This does not suggest bulls are either. Basis is in the driver's seat and all it wants to do is converge. Where it will converge continues to be the objective.
In the feeder markets, when I read others comments -- and I read a lot -- I am told when packers have margin, regardless of how small, they will keep the pipeline running for as long and hard as they can. In the past, I've dealt with "bettin' on the come" on some enormous percentage with all feedyards. I've seen yard managers scramble at $30 and $40 spreads that appeared no way profitable.
Today, I hear that feeder cattle are too high and the mere $1.00 or $2.00 profit that could potentially be solidified as too much risk to assume. Not only do I not believe this, I believe feedyards are going to want to own inventory going forward to meet the robust export demand and growing domestic demand.
I am in no way ignoring the fact that pork and poultry will remain bountiful in the coming year. However, this has been this way for the past three years with pork and poultry production continuing to rise. So, I'm a little uncertain as to why this situation is more important now than it has been previously. In all honesty, this issue has been discussed a multitude of times by myself as well as others.
With these factors known and still in progress, it appears to lessen the impact most perceive. Unlike the fats having to deal with basis, feeders do not. Actually the basis having moved the way it did from sharply positive to negative by $6.00 is a strong indication of a healing market. With the basis just slightly positive by $2.00, feedyards are urged to implement some hedge at these levels.
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