Sort & Cull

If you're looking for a topographical map to anticipate fed cattle hills and dales from now through the first third of 2017, don't bother checking with the cartographers at the Merc. Given the extraordinarily monotonous pricing currently shared by December, February and April live futures, board traders seem to be orienteering through the cattle wilderness with charts last updated in 1491.

As we get set to adjourn for Thanksgiving, the spread between these three contracts is historically small. For example, futures suggest that next spring's cash market (assuming a consistently weird basis) will be no more than 50 cents higher than next month's average feedlot trade. Apparently, we need to lose all we know about seasonally improving beef demand and traditionally smaller feedlot placement activity in December.

While February has shifted to a small premium over spot December in recent days, the winter issue has traded virtually flat through the fourth quarter, scoffing at the weather threat to cattle performance as much as the most dire prophet of global warming.

I've heard some apologists suggest that the board's imitation of a five-month-long ping pong table was a confident prediction on an extended period of price stability, a wider window where premiums and discounts will be as productive as tits on a boar or counseling President-elect Trump to give up his Twitter account.

Such talk strikes me as plain laughable. How can anyone who's lived through the market's extreme volatility over the last year (i.e., where $3-$5 weekly swings became painfully frequent if not routine) possibly imagine that 2017 will suddenly usher in a less emotional and more consistent assessment of beef fundamentals and price potential.

I think there's a better explanation of why nearby live futures lack any significant price curves relative to the next 150 days. Rather than reflecting a new day of price stability, the board's flatness is yet another sign of the broken basis mechanism. Since neither specs nor commercials feel comfortable with basis assumptions (i.e., the spot and unfolding relationship between cash and futures) they are extremely reluctant to structure the market in ways that significantly deviate from spot realities.

In short, market premiums (or discounts) are almost impossible to stage if traders can't reasonably depend on basis behavior. I'm not saying the cattle board will stay as absolutely spineless as a jellyfish over the next several months. But unless someone finds a way to engage significant basis repair, futures will at least remain slow in entertaining wild notions of a round cattle market world.

For more of John's commentary, visit http://feelofthemarket.com/…

(AG)

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