Frank Petricca is a branch manager and account executive with The Price Futures Group in St. Charles, Ill. He focuses on long-term approaches to commodity markets.
My October special report recommending buying live cattle and selling feeder cattle is showing almost a $1,000.00 profit per 1 contract in two short trading days. Of course, past performance is not indicative of future results and there is risk of loss in trading futures.
This trade is unusual because when long or short positions are established at extremes the short-term fundamentals are, by and large, bearish on the bottom and bullish at the other extreme.
Right now, as my friend Charlie Andrews articulated this week, "The way we are hedging feeders in the fall is best in years, commercials won't contract as in the past so we need funds to support those thin markets."
The September Cattle on Feed report also told us: Feedlots with a 1,000 head or more capacity indicated cattle and calves on feed, as of Sept. 1, totaled 10.50 million head, up 3.6 percent compared to a year ago, with the pre-report estimate average expecting an increase of 2.7 percent. An obviously bearish number.
August placements in feedlots totaled 1.92 million head, up 2.6 percent from a year ago with the pre-report estimate average expecting placements down 3.2 percent. Also, bearish.
August marketings totaled 1.98 million head up 5.9 percent. Bullish for live cattle futures.
Many of you may ask, what’s the main difference between live cattle and feeder cattle?
Feeder cattle are weaned calves just sent to the feedlots (about 6-10 months old), and live cattle are cattle which have attained a desirable weight (850-1,000 pounds for heifers, and 1,000-1,200 pounds for steers), to be sold to a packer. The packer slaughters the cattle and sells the meat in carcass boxed form.
Another short-term bullish argument for fat/live cattle is the USDA forecasts for net exports of U.S. meat and poultry, which are expected to rise again this year from previous years.
U.S. beef exports are projected to increase by almost 7 percent in 2017 as the beef sector recovers from a multi-year drought in major beef-producing states and U.S. production increases.
Conversely, U.S. beef imports are forecast to decline by 11 percent in 2017, as supplies in Oceania tighten with herd rebuilding and larger supplies of U.S. beef becoming available at lower prices.
Being apprehensive or a little squeamish in establishing a trade that one is not familiar with is the first step into commodity chaos. The way one feels about a trade means nothing. If one is apprehensive, that’s unproductive. If you hope "this one" will be profitable, it probably won't.
Our job as investors is to take all the emotion out of commodity trading and put our faith/commitment into a long-term strategy that gives us an opportunity to capture major commodity movement or what I call “episodic volatility.”
Right now, there is nothing to think about except to: buy fat/live cattle and sell feeder cattle. This spread is trading in the lower 25 percent of the long-term trading range and my long-term formula is up.