Live Cattle Futures Succumb to Feeder Futures Collapse

My wife’s intuition tells me that I need to say a few words about “limit down (or up)” days. First, what they are: The government in all its wisdom and through its Commodities Futures Trading Commission (CFTC) has determined that no commodity future should be allowed to change in price by more than their arbitrarily determined number. That is the “limit.” 

So, a limit down or up day essentially boils down to–there was not a market. Very few, if any trades were made simply because the fixed price would not clear the market. 

Don’t you just love it when government functionaries think they are smarter than 300,000 (or more) people making their own decisions? — jtl, 419

From The Beef by Cassie Fish, CassandraFish.com

A fourth limit down day in feeder cattle futures is proving too much for live cattle futures and each contract month has made a new low for the move catapulting through support and reaching levels not seen since September. Perhaps the CME needs to step in and expand the limit for feeder cattle futures which will allow the longs to liquidate so the market can relieve the pent up pressure and halt this snowballing money game. Otherwise this debacle will have a difficult time concluding.

If it wasn’t such a tragedy, it would be laughable that one of the smallest markets at the CME, in terms of open interest and volume is now holding not only live cattle futures hostage but the cash cattle market as well.

         Panic, Panic – Money, Money

Since the daily limit down moves make it difficult if not impossible for most feeder cattle futures longs to bail out of losing positions traders look for something to sell, in order to spread up their long, and live cattle futures, especially the deferred contract months, have been the short leg of choice. Panic selling ensues in the live cattle as well and any would be buyers keep their hands in their pockets, knowing full well that until the feeder mess is dealt with, bottom picking is too dangerous.

New stringent margin requirements have only upped the ante literally, as traders must wire quickly or endure harsh penalties. Here’s the CFTC ruling as explained by clearing firms:

In direct response to the recent CFTC ruling, Futures Commission Merchants will start posting aged margin call charges on a daily basis, starting Nov 17th. Specifically, for margin deficiencies less than $10,000, on day 5 of the margin call, a $10 fee will be imposed daily. Calls from $10,000 to $25,000, on day 3 will be charged $10 per day until the call is met. On a third day call in excess of $25,000, a fee of $25 per day will be charged until the call is met. This is in response to a new CFTC ruling. This is an industry wide ruling.

         Small Market Wields an Ugly End to 2014

Discussions of fundamentals today are important only to point out that a similar collapse in boxed beef prices or cash cattle prices can’t be found. There certainly have been other times in history when run-away breaks have occurred in cattle futures- numerous mad cow scares, 9/11, pink slime, dairy buy-out, Nixon price freeze.

This time, it is longs trapped in an illiquid, small futures contract making mincemeat out of the Bull of 2014 with 10 more trading days left in this historic year. It’s very easy to read a great deal into this break and draw conclusions that may or may not be based in reality. One thing is certain, an extreme extreme like this one will have some sort of counterbalancing reaction.

The Beef is published by Consolidated Beef Producers…for more info click here.
Disclaimer:  The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.

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