Sort & Cull

I come from optimistic stock.

Family reunions were always heavily peopled by farmers and livestock producers who couldn't shut-up about "bred heifers" or "next year's calf crop" or "the state of the cattle cycle." Just because you weren't entirely sure whether those fat steers sold on Friday would cover the total bank note, that didn't silence your passionate view regarding herd expansion through the end of the decade and beyond.

Such a background probably explains why I always look forward to the early fall when live cattle futures typically morph into a stairways-like structure with higher and higher prices leading the way forward. For reasons of seasonal placement patterns, predictable shifts in beef demand, and odds of adverse weather, the December contract surpasses October, February pushes beyond December, and April outperformed February.

At least, that's what happens in a good, law-abiding year. But when it came to traditional market structure, the fall of 2016 was overrun by outlaws.

If you recall, the structure of live cattle futures this time last year was as flat as a pancake. It's not much of an exaggeration to say that for the first two-thirds of the fourth quarter, December, February and April consistently traded within 100 points of each other. I remember joking that CME traders had forgotten how to spell "weather premium," how the board's complete indifference to Old Man Winter's power to affect cattle and beef prices represented the greatest endorsement of global warming ever seen in agriculture.

But what a difference a year makes.

A premium structure to live cattle futures has returned with a vengeance this fall. In fact, the extreme nature of the staggered appreciation (i.e. from October through next April) almost like a wild corrective swing of the pendulum. As of Friday's close, December, February and April contracts hold premiums over spot October of 585, 848 and 1,038 respectively.

Talk about great expectations.

So why have premium promoters become so drunk with enthusiasm?

Clearly, their incriminating breath-test has nothing to do with images of tightening meat supplies anytime soon. To the contrary, virtually no one doubts the production stage is consistently set for record red meat and poultry tonnage through the balance of the decade.

While I can't fully explain the impressive inflation of deferred live cattle futures, let me float a couple of possibilities. First of all, perhaps all the extreme weather in 2017 has made speculators more sensitive and nervous about how the great outdoors can scramble s&d realities in a bullish way.

Yet a bigger factor may simply involve increasingly bullish assumptions about beef demand, both domestic and foreign, but especially the latter. What's the one heavy-hitting driver that cattle golfers have in their bag that wasn't there in the fall of 2016?

China. Plain and simple.

To be sure, no one knows how quickly this new market will develop.

But my guess is that most of the showy premium defenders now at work seriously believe it will be sooner rather than later.

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

(CZ)

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