Sort & Cull

What better way to spend the first day of summer than in a dark office spelunking through the statistical caverns of feeder cattle price history spanning 18 years?

I know. Just call me a party animal.

There was just something so strangely odd about the enormous premium of August feeder futures over the cash index that I turned a blind eye on all social invitations and fun distractions. While it's true I don't actually own a dance card, investigating the audacity of the feeder board's lead proved to be irresistibly curious.

Judge for yourself.

Looking at late-June market action from 1995 through 2012, August feeder futures have traded over the cash index 10 out of 18 times. The average premium in those 10 years was $1.67, the same as the average discount in the other eight years.

The largest premium in my study was measured in 2008 at $3.79, while the largest discount was scored in 2005 at $4.85.

If you throw all the data into one pot and stir, this is what the average August premiums look like: 5-year average, $1.57; 10-year average, $0.20; 18-year average, $0.18.

At this point, I'll spare you the malarkey about standard deviations or T and Z scores. But feel free to write for the fascinating details.

So what's it all mean? Perhaps not much.

Averages are simple, alluring, and extremely dangerous. Remember the story about the statistician who confidently tried to cross a river that was a foot deep on average. He drowned.

One of my favorite George Burns lines is: "If you live to be one hundred, you've got it made. Very few people die past that age."

But here's what makes this number-numbing tingle for at least a minute or so. Currently, spot August feeders is sailing more than $8 above the cash index.

Not only is the 2013 premium six times larger than the 5-year average, it's more than double the size of the 1995-2012 high found in my study.

And those of you who follow these spreads know that the August premium is actually a shadow of its former self. Through most of the late winter and early spring, August marched as much as $10 ahead of the cash index.

Finally, what makes this bullish leadership no less than shocking is the bleak state of the commercial cattle feeding context. With forlorn feedlot managers slogging through another year with triple-digit losses, it's almost inconceivable that would be willing to support even higher input costs down the road.

Here are two possible explanations.

Perhaps the long side of the feeder pit is uniquely populated by the most determined corn bears in town, commercials and specs who see planted acres holding firm, production potential exceeding trendline yields, and eventually a bumper crop big enough to drive cash corn well below $4. In a less goofy way, one could argue that many simply see (especially given my next suggestion) a long feed position as a relatively safe way to bet on cheaper corn.

But my better guess is that the surging premium of August futures revolves around the perception of an aggressive tightening of feeder cattle supplies in the second half of the year. While the feeder crunch was temporarily masked through the first third of 2013 as backgrounding programs (i.e., ambitiously loaded in the wake of the 2012 drought) emptied into feedlots, it could be fully exposed in the third quarter as the run off grass proves to be historically short.

If the growing corn crop turns out to be a real bin-buster, the August feeder board may just be warming up. Even after the late-week pop seen Friday, the spot month still remains nearly $20 below its contract high set in early January.

From more John Harrington comments, visit http://www.feelofthemarket.com/…

(AG)

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