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Published January 11, 2011, 08:47 AM

Cattle market volatile lately

The cattle market Dec. 22 took many traders by surprise. Dec. 22 was forecast to be a volatile day in various markets, and it was.

The cattle market Dec. 22 took many traders by surprise. Dec. 22 was forecast to be a volatile day in various markets, and it was.

Perhaps the cattle market would get an “A-plus” in volatility. Futures traded early near limit-up and fell lower on the day, then returned to close in the upper half of the day’s range or higher. There’s no other way to describe it than to call it wild. The day’s trade started with short options that traders were caught in and needed to buy futures in Februrary and April to get “delta neutral,” to use a financial term. This large-order entry on a thinner market set the market in motion. However, there also was a cash trade behind the day.

First, cash traded in Texas at $102, up $1 from the previous week and before long, reports were circulating that cash in Texas jumped to $104. The hot beef trade in Nebraska traded at $161 to $164, up $2 to $5 from the previous week. This gave a strong close to the December futures and added support under the other contracts.

April futures again made new contract highs. I was asked by a feedlot client if this was abnormal for cattle prices going into Christmas. I was amazed when I scanned the past 34 years of data and found that it is not uncommon this time of year. There is a marked tendency, basis the February cattle contract, to put in a low near Dec. 21 and rally into Christmas and beyond.

I should tell you that there is another tendency to rally into Jan. 9 and 10, then break and rally again.

If the pattern turned counterseasonal and the prices fell into Jan. 9 and 10, a rally would result. Either way, it seemed that a strong market into Christmas and beyond tended to invoke more optimism over the past 34 years, at least in 23 of the 34 years. In other words, 11 out of the past 34 years either were bear years or choppy, sideways years. I also noticed that if corn futures had been priced positively during the year, cattle tended to respond more positively in the December to January period.

Please note: I am only telling you what I have concluded. Remember, cattle are at all-time highs in the feeders.

Still, I don’t see any reason to think cattle will fail here. There are many analysts that think the U.S. economy is getting better. Frankly, I am not so sure. I can see both sides of the equation. However, since I am optimistic toward the dollar index, I suppose a strengthening economy would be helpful toward our currency. Export demand is good.

Demand for organ meat in beef and pork appears robust for exports. We also have to realize that we have a growing population of Hispanics and Asians in the U.S. They tend to eat cuts or parts of animals that many of us do not spend money on. This also is helping to support cattle prices, and in time, I think the hog market will be good as well.

Hog futures don’t tend to lie down too well. I think June to July futures should be good. Cattle supplies are forecast to grow tighter beyond January. The winter weather also will be key for weights.

This year, weather appears to be milder in cattle country than a year ago. The quality of corn is much better with the past season’s crop and that, along with good feedlot conditions, is allowing for fabulous weight gains. Long story short, I think cattle are going to try for higher prices as we go into January, and any breaks near term should be short-lived.