O ye'll tak' the high road, and I'll tak' the low road,
And I'll be in Scotland afore ye,
But me and my true love will never meet again,
On the bonnie, bonnie banks o' Loch Lomond.
While I don't have a Scottish bone in my body, I've spent the entire morning in a state of not-so-bonnie confusion. Against this week's maddening market backdrop of sharply higher cash sales on one hand and crashing cattle futures on the other, the haggis has never tasted so rank and the bagpipe has never sounded so torturous.
With spot December live losing $2.53 from Friday to Friday and the five-area steer average at the same surging $3 to $4 higher, I just can't get the old song out of my head. Which market road truly represents the short cut? Will lovers of cash and futures really never meet again?
So once again, the market stage is set to start next week with an extraordinarily strong basis. Whoever heard of early December country sales holding $6 to $7 above nearby live futures? The problem of convergence just won't go away.
Monday will be first notice for December live, and you would think this basis on steroids would quickly cause short bought packers, the same guys who were so drunkenly spendthrift this week in terms of procurement, to absolutely demand all the deliveries they could find. Such a strategy seems like a no-brainer on paper.
Maybe, but it's not the way to bet.
You've all heard my broken record about the chronic disconnect between CME cattle futures and the feedlot cash trade. This rupture is serious enough that commercial buyers (i.e., beef processors in the cash of live contracts) no longer consider the board to be a viable means to hedge the cost of slaughter steers and heifers.
It's critical that we somehow find a way to redesign cattle futures in such a way to attract and maintain a healthy balance of both commercial buyers and commercial sellers. Needless to say, a generous population of spec buyers and sellers is also important. But looking at the current trading demographic, a dearth of specs is far from worrisome.
Beyond the need to reinvent the mechanism (frankly, I don't see it happening anytime soon), we need to admit that even when the cattle delivery system carried some respect, late-year cash and futures could be slow to merge. Why? Because both fundamentals and slaughter schedules can vary significantly from the first half of December to the second.
For example, the holiday-shortened weeks of Christmas and New Year's Day can make it tough to sell ready cattle in a timely fashion. Indeed, that's why cattle buyers tend to be more aggressive between the first and 15th. The awkward of this scheduling reality may partially explain why the path to Loch Lomond now seems so uncertain.
For more of John's commentary, visit http://feelofthemarket.com/…
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