Sort & Cull

"It's time we had a little talk," I can still remember my Dad saying, his voice and eyebrows lowered to ominous levels that always meant serious business.

My puberty-ridden voice cracked as he directed me to take a seat in the barn just before we were expected to go in for supper.

"Your Mother and sister don't need to hear this," he sternly warned.

This was it, I thought. The man-to-man briefing I had been waiting for, the facts of life speech, the birds and bees lecture, the "keep it in your pants" sermon. The great day had finally arrived.

Yet it turned out that the Old Man was aiming higher than I had hoped. Instead of the nuts and bolts and responsibilities of sex, his heavy topic was spending, over spending, the kind of spending more reflective of addiction than necessity.

When live cattle futures imploded with key reversals on Thursday, swinging from all-time highs to triple-digit losses in less time than it takes to officially raise the debt ceiling (indeed, far less time), I got the feeling that the board's collective voice of traders was similarly calling out for "the talk."

When the December and April contracts stretched as high as 134 and 136, respectively, it marked an amazing climax (at least temporarily) of bullish psychology and determination. In just a short month, this red-hot market had surged 600 points higher, an accomplishment made all the more impressive by the government shutdown and the blackout of official market data.

Perhaps to spite our do-nothing Congress, cattle traders took just 30 days to reach price levels previously not anticipated until late December or early January.

But while Thursday's panicky sell-off may have been sparked by some trading epiphany en masse (i.e., "too far, too fast"), I suspect that part of the enormous price collapse was stoked by commercials suddenly questioning spendthrift behavior in the feeder cattle market.

For while deferred live futures have spent the early fall soaring to heights, the cost of feeder cattle and attending fed breakevens have been skyrocketing even faster.

Here's just one scary example: an 8-weight steer laid in for $170 (some have spent less, but some have spent more) and fed $4.25 corn will need right at $140 in February just to crack the nut.

So even with the extraordinary bullish push of live futures over the last month, deferred premiums still remained nearly $5 under where they needed to be. The sound of frightened light bulbs simultaneously clicking on late Thursday was nothing short of deafening.

While I think it's too early to conclude that futures have already taken the full measure of 2014's bullish potential (actual meat supplies could be tighter than currently imagined, beef demand could be even stronger, and the cost of feeders might be some lower), this week's abrupt about-face should at least serve as a sober reminder of the chronic temptation to overspend.

Looking back to that moment of truth with my own cattle-feeding father, I can see why the rules of the dating game were postponed for another day.

Dad knew that if I followed in his footsteps, resisting girls and the ways of the flesh would be the least of my problems.

http://feelofthemarket.com/…

(AG)