Will the cattle market become the next cocoa?

I added this introduction to the original work. This was written last weekend and I plan to run it later this week. But that all changed on Monday afternoon when news broke that a human had been infected with avian influenza after coming into contact with a dairy herd in Texas. Did my thoughts about what I wrote change? no. However, it led the discussion to one of chaos. So the next headline is going to change the velocity of the market in a certain direction, if not the direction itself.

I often think of my late friends John Harrington and Walt Hackney. Not only did I enjoy their company, but they both forgot about animal husbandry more than I will ever know. They were old-fashioned cattlemen, or as I told them without complaint, people raised on feedlots. I still vividly remember, many years ago now, John calling me one day to talk about the broken cattle market (futures vs. cash). If anyone else said that, they would think I was exaggerating. But John wasn’t like that. While he is an observant and entertaining writer, he also speaks just to get himself heard. As for Walt, the best time I spent with him was on the Iowa Public Television show “Market to Market.” The host asked him a short question, and then we all sat down and listened to one of Walt’s historic answers.

I miss my friends. Their opinions on the latest topics in the cattle market are highly sought after. I’ve heard rumors that there is increasing talk about the next generation of cacao in the cattle market, both raw and feed cattle. What does this mean? As we discussed recently in this column, cocoa has been on a parabolic run lately, with the most recent May contract increasing in value by nearly 200% over the past six months. May cocoa hit a low of $3,395 (per tonne) on September 29, 2023 (the last trading day of the month), hit a high of $10,080 on Tuesday, March 26, and ended the month at $9,766. Finished. Although much of this movement is believed to be due to bad weather in West Africa associated with the El Niño phenomenon, there are also a number of geopolitical factors affecting production. The bottom line is that cocoa’s forward curve remains inverted until at least the December 2025 contract, meaning fundamentals are expected to remain bullish.

When it comes to bulls, you need to ask whether there is the same bullish fundamental support in either or both markets. Cattle is not a storable commodity, so each futures spread must be analyzed based on its historical merits. In other words, just because the spread for live or feeder cattle reverses, it doesn’t automatically mean it’s bullish like it is for storable commodities. The flip side of that is that strong carry doesn’t make the cattle spread bearish. It all depends on how they compare historically. A five-year comparison table shows that the spread between live and feed cattle (as well as lean pigs) was neutral at the end of March. Does this mean the cow cannot explode higher? No, but that means neither market has the underlying catalyst to cause such a move.

What about the technical aspects? Let’s start by looking at live cattle futures trends over three different time frames.

• Long Term (Monthly Chart): Things got interesting at the end of March as the nearby April futures contract (LEJ24) completed a bearish surge reversal on the continuous monthly chart. This indicates that the long-term trend is downward.
• Intermediate term (weekly chart): Looking at the weekly chart of the more active June futures (LEM24), we see a new 4-week low recorded last week. This confirms that the medium-term trend is also downward.
• Short-term (daily): This is where it gets interesting. Market bears will argue that the gains seen on Thursday and Friday constitute a bear flag, meaning there is more short-term downside. Meanwhile, market bulls will say that the short-term downtrend is over.

Why all the fuss about trends? Newsom’s Market Rule #1 tells us this: Don’t be fooled by trends. why? Because when Newton’s first law of motion is applied to market analysis: A market in trend will remain in that trend until acted upon by an external force, and that external force is usually a non-commercial activity. In other words, if we cross the trend, we are fighting Watson (my name for the algorithmic investing industry in general). The latest CFTC Commitments of Traders report (legacy, futures only) found:

• Non-commercial traders reduced their net long position in live cattle futures by 6,860 contracts, to 66,910 contracts as of Tuesday, March 26th.
  • This includes a decrease of 5,154 contracts in long futures.
  • And futures sales increased by 1,706 contracts.
  • The fact that the fund is increasing its shorts and decreasing its longs is not overly bullish for Live Cows
• Non-commercial traders reduced their net long position in feed cattle futures by 3,476 contracts to 1,674 contracts as of Tuesday, March 26th.
  • This includes a 2,695 contract decrease in long futures.
  • And the increase in futures sales is 781 contracts.

Before we end this conversation, I’d like to take a look at the cash index for live cows, at least this time. You may remember that I was tracking the National Corn Index. Let’s compare it to 10 years ago, but what would happen if we did the same thing with live cows?Here, from January 2009 to November 2014, the live cow index (LEY00) was on an upward trend. (based on monthly closing prices only). The current movement started in June 2020 and we expect this trend to continue as we see similarities holding. In fact, based on average moving rates, this continued pattern is stronger at this point than was seen a decade ago.

Could the cattle market become the next cocoa? The basic structure of the market tells me. However, the final trend of the cash index’s monthly closing values ​​only continues to point to that possibility. This is one of the questions I would like to answer for John and Walt.

On the date of publication, Darrin Newsome did not have (directly or indirectly) any positions in the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.