Sort and Cull
What a Live Cattle Market With Open Interest at a 6-Year Low Means
The other day I sent a quick message to a market mentor of mine, asking him a question, and he jokingly replied, "My crystal ball is broken right now, but I ordered another one on Amazon and it should be here in the next seven to 10 business days, check back with me then!" I'm not sure what part of that reply was funnier, the fact that a man in his 70s knows enough about Amazon to come up with that spirited of a reply, or that it's the truth; we all wish we had a crystal ball at this point.
The cattle market seems to be caught between two realities of now versus later. The short-term reality is the cattle market has an uphill battle ahead of it for at least the August and October contract period, when risk is likely and anything could happen. The long-term reality is that of a strong and prosperous market, when a thinner cow herd supplies fewer numbers to the beef supply chain, which favors cow-calf producers and potentially feedlots if corn prices regress.
Fundamental influences on the market are easiest for most to understand, whereas technical stimuli can be abstract, which is why we must address the point when the live cattle market's open interest reached a six-year low last week.
First, let's define open interest. The CME's website defines open interest as, "The total number of futures contracts held by market participants at the end of the trading day. It is used as an indicator to determine market sentiment and the strength behind price trends. Open interest and volume are related concepts, one key difference is that volume counts all contracts that have been traded, while open interest is a total of contracts that remain open in the market. Traders can think of open interest as the cash flowing to the market. As open interest increased, more money is moving into the futures contract and as open interest declines money is moving out of the futures contract."
This highlights the fact that traders aren't comfortable with where the market currently resides. Brett Crosby, owner of Custom Ag Solutions, said, "The fact that open interest sits at a six-year low means that there's too much uncertainty on both the upside and downside to attract traders. It also indicates the price is too low for commercials to hedge and too high to attract spec buyers."
Moving forward, much will depend on what boxed beef prices and slaughter speeds do. Thus far throughout the summer, boxes have been competitive with pork and chicken, which has allowed consumers to continue to buy. The risk moving forward, however, is that consumers stop buying, at which point longs are pushed away and the market's downside is frightening. However, if boxed beef prices can maintain a steady tone and slaughter continues to run aggressively until supplies thin later this fall, then pressures ease.
Nevertheless, traders and cattlemen alike are hesitant about what's to come in the market's immediate future. As the cattle market trenches through a period of cow herd reduction, supplies are undoubtedly going to become thinner, but the market won't see those price jumps fully until 2023 and potentially 2024, So the question that remains on everyone's mind is: What about now?
ShayLe Stewart can be reached at ShayLe.Stewart@dtn.com
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