Latest / CattleUSA Daily / 139: Open Interest, Flat Cash, and Breaking Down Today’s Cattle Market with Dan Gerhold

Transcript

139: Open Interest, Flat Cash, and Breaking Down Today’s Cattle Market with Dan Gerhold · CattleUSA Daily

• 0:00
  Welcome to another episode of the Cattle USA Daily podcast.
• 0:03
  Today we are welcoming back Dan Gearhold with the Cattle USA
• 0:06
  insurance team where we are talking all things commodities
• 0:10
  markets, what is happening or maybe not happening right now in
• 0:14
  the markets as far as trading and everything like that goes
• 0:18
  right now. Dan breaks all of that down for
• 0:20
  us today kind of what is happening or what is not
• 0:23
  happening. And then we actually dive into a
• 0:26
  little bit of an educational topic today to talk about a few
• 0:30
  different things in the markets, what they all mean and breaking
• 0:35
  all of that down. So let's go ahead and dive into
• 0:38
  today's episode with Dan. But before we do, if you guys
• 0:40
  could take a second to like, subscribe, write in, review this
• 0:43
  podcast, we really appreciate it here at the team.
• 0:46
  It helps us continue to grow, reach more people and make a
• 0:49
  bigger impact within the cattle industry.
• 0:51
  And if you enjoyed today's episode and think that it would
• 0:53
  be beneficial to another producer or someone else that,
• 0:56
  you know, share it with a friend, we appreciate that as
• 0:59
  always as well. So thank you guys so much for
• 1:01
  all the support that you have continued to give us over the
• 1:04
  past, Oh my gosh, almost seven months now that we've been doing
• 1:07
  this podcast. I really appreciate it and
• 1:09
  everyone at the Team does as well.
• 1:10
  So thank you guys for taking a few seconds to go do those
• 1:13
  things. And let's go ahead and dive into
• 1:15
  this podcast episode with Dan. Welcome to the Cattle USA Daily
• 1:22
  podcast, your go to source for the latest livestock markets,
• 1:25
  industry insights and the updates shaping agriculture
• 1:28
  today. I'm your host, Lauren Moylan, a
• 1:31
  passionate advocate for agriculture here to keep you
• 1:33
  informed and connected. Now let's dive into today's
• 1:37
  episode. Dan, welcome back to the
• 1:43
  podcast. How is life in Iowa treating you
• 1:46
  this week? It's wet, but it finally cooled
• 1:49
  down this morning, so we're going to take it as a win.
• 1:53
  Yes. It was pretty nasty last week or
• 1:57
  this weekend. The 9% humidity every morning
• 2:00
  and 90°. Oh yeah.
• 2:03
  It was very similar in northeast Kansas, where I spent my weekend
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  cleaning out my grandmother's house to prep for her estate
• 2:10
  sale. And the heat with no AC Gross.
• 2:14
  I was ready to find the nearest Cliff.
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  I'm not gonna lie and go skydiving.
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  It was awful. It was really, really, really
• 2:21
  bad, but we survived. So I'm grateful for this cool
• 2:24
  snap. Most summers, like I'm not
• 2:27
  typically a person that's like, I'm ready, like to be done with
• 2:30
  the heat. I typically am like I'm ready
• 2:32
  for fall, but I'm not ready for winter.
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  I don't like being cold. I would rather be warm.
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  But this summer I'm like, I'm done.
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  I I'm done and I don't even work outside.
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  I work inside in my cushy little air conditioned office and.
• 2:44
  I can done. I hear you.
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  I think everybody's a little frustrated with all this, all
• 2:48
  this moisture. And how long is it for us to be
• 2:52
  frustrated with rain in August? It's just so not normal.
• 2:56
  Not in the slightest. Not in the slightest.
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  I wish that we could bank it and be like, OK, we don't need it
• 3:01
  right now, but we're going to need it in a few months.
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  Can you come back then? And what in the meantime, send
• 3:06
  it to somewhere that does need it?
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  Like I know we still have places dealing with droughts, so just
• 3:10
  just send it there and come back around in a few months.
• 3:13
  Yep. Yeah, not too sticky, just
• 3:16
  weather. Jeez.
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  Well, what's happening in the markets, or rather, what's not
• 3:21
  happening in the markets, Dan? Well, it's been a whipsaw, but
• 3:25
  at the same time it's basically gone nowhere.
• 3:27
  So nothing's happened. There's been, you know, 6 to $8
• 3:31
  moves in livestock, in cattle grains have made a rally and
• 3:35
  then sold back off. And it's it's just a lot of
• 3:38
  sideways pattern, a lot of Segways trading.
• 3:40
  It's it's a wait and see game, just a boring month of August.
• 3:44
  So, you know, there's, there's just not a lot to talk about
• 3:48
  right now. You know, waiting this week on
• 3:50
  cattle on feed report, waiting on cash to develop, which
• 3:53
  probably won't happen until Friday.
• 3:56
  I might get started today, but not a big way, just a lot of a
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  lot of whips off for no reason and really going nowhere.
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  So not plain and simple. Not a lot to talk about porn.
• 4:10
  Yeah, there. There really isn't.
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  There really isn't, unfortunately, Dan.
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  Is that typically like the case for this time of year though?
• 4:16
  Like we're kind of rounding out the dog days of summer, Like
• 4:21
  this is a little bit to be expected, right?
• 4:23
  Yeah. I mean, honestly, yes, there's
• 4:27
  everybody's waiting on, you know, a reason to buy grains and
• 4:30
  I'll pull it off this hopefully what it could be a summer low.
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  Everybody's waiting to see our cattle going to get up and
• 4:37
  going, you know, once we pass this Labor Day weekend coming up
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  in a couple weeks, a lot of wait and see games.
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  Traders just not overly confident with anything right
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  now on the buy or sell sides. Yeah, it's back to school
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  season, you know, meats, products, everything just kind
• 4:56
  of goes into summer hibernation, if that makes any sense and
• 5:01
  waits for for news to happen. The old rule of thumb is late
• 5:06
  August, September, October. You know, it's not normally
• 5:09
  friendly to equities either. So it's hard to get wildly
• 5:13
  bullish cattle here even with with what appears to be a
• 5:17
  bullish cattle on the report coming hard to get bullish, you
• 5:21
  know, when cash has been pretty stagnant the last two to three
• 5:24
  weeks. It's hard to get bullish when it
• 5:28
  seems like you know, we we were on the thing up, set some news
• 5:31
  highs take 6-8 bucks off of it right back up, you know, test
• 5:35
  those highs, take 6-8 bucks off of it.
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  Yeah, feeder cattle are making new all time highs yesterday or
• 5:43
  the day before. But at the same time, you know,
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  that's that's been a whip saw too.
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  You're coming into August expiration, you know, that has
• 5:51
  to settle up to that index. The index is whipping back and
• 5:54
  forth, you know, pretty violently just because of the
• 5:57
  low volume of Peters cattle that are selling.
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  So you know, your your sail barn cattle are running extremely
• 6:03
  high. Your some of your direct cattle
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  are quite a bit cheap. So that thing is bouncing back
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  and forth pretty hard. But like I said, in the end,
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  it's not going anywhere. So it just makes it a boring
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  market. I guess we should be thankful
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  it's not a great Big Bear market.
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  Yes, take what we can and find the find the joy in the in the
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  little things. As far as this goes, Dan, I want
• 6:26
  to dive into kind of another topic.
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  So little change of events for us.
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  We're not going to spend the entire time talking about the
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  market because frankly there's nothing to talk about in the
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  market. Let's dive into our topic that
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  we wanted to kind of talk about today.
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  If you would like to introduce that and kind of start to share
• 6:44
  some of your just thoughts on it as well.
• 6:47
  You bet. Yeah.
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  So what we we kind of mentioned explaining or doing a little
• 6:52
  education piece on was open interest.
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  You know, we look at traders, the way they trade in the
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  market, look at managed monies, hedgers, you know, commercials,
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  All of these are a factor when it comes to features and options
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  trading. So, you know, you look at a
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  market that's going sideways, they're going nowhere.
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  It's it's not a big thing to discuss right now, but
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  eventually we're going to stop going sideways and we're going
• 7:16
  to go violently up and violently lower.
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  Very likely sideways patterns don't last forever.
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  So if we watch the open interest report, we can tell getting a
• 7:26
  rough idea what traders are doing.
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  So let's say the market decides to break out to the upside.
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  If that happens and open interest is going up, that means
• 7:36
  we have new strong buyers coming into the live cattle market.
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  That's a bullish thing to see. You know, you want to see new
• 7:43
  fresh buyers taking the long side.
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  That means they feel like this thing is worth the risk and it's
• 7:49
  got more upside potential. If the market is going up on
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  lower open interest, that's typically a sign of your hedges
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  blowing out of short positions. They're growing in the towel.
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  They're tired of the margin calls.
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  So that's not a strong market. Sometimes that can be called a
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  dead cap bow. You know, you look at the feeder
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  cattle market 2 weeks ago, I believe, you know, open interest
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  was dropping in a higher market. So we were very, very concerned
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  that are we putting a high in here?
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  Inevitably it came back through with the cash feeders in the
• 8:19
  barn sale. Barns didn't soften, so the
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  market didn't fall apart. Had cash feeders soften a little
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  bit, you know, in a normal year we would have seen more numbers
• 8:29
  in the last two weeks. You know, it probably would have
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  taken a big chunk out of the the feeder cattle futures market
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  with plain and simple ran out of new longs or new buyers.
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  So that's a big thing we watch is that that open interest
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  coming back. You know, talking about managed
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  money, they've been relatively what should say ho hum lately.
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  They're not adding a lot of long, they're not exiting a lot
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  of longs for the most part, manage money, trade to the long
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  side of live cattle. They use it as an inflationary
• 9:03
  hedge. They're also using it, you know,
• 9:05
  to play with the stock market. So they, they trade on the long
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  side for the most part every now and then, you know, let's say
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  2-3 times in a decade, they'll get on the short side, but not
• 9:16
  by very many contracts. So they've been relatively
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  steady on on their trading and just holding their positions.
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  I hope we don't give them a reason to exit because that's
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  A130120130 thousand contracts, you know, net long that they
• 9:32
  they could cause some serious damage to this market.
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  But you know, if they decided to go to a new record that probably
• 9:38
  push you up closer to 160,000, I'd love to see that If we give
• 9:42
  them a reason, you know, that reason up at these price points
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  is going to take higher cash, you know, new all time records.
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  I'd say we somewhere close to that 250 cash.
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  And then, you know, you're also going to have to give them
• 9:56
  fundamental reasons. That's upfront.
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  You're going to have to give them fundamental reasons to
• 10:00
  stay, continue to roll that into the back.
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  But they think this market's going to last longer.
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  Another big concern, you know, we're, we're talking about that
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  we've watched in the last I'd say 3 weeks is spread.
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  So when we talk about spreads, you know, we're comparing August
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  to October, August to December, we're comparing October to
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  December, October to February, you know, so on and so forth.
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  In the last two to three weeks, we've seen the back months going
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  leading the front higher. So what I mean by that is your
• 10:33
  August and your October's been relatively flat.
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  Cash hasn't moved in the last three weeks, so nobody wants to
• 10:39
  be aggressive buying the front. But with Catalan feed this week,
• 10:43
  they've been buying the back because we're expecting lower
• 10:45
  placements. So they've been buying that
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  February, they've been buying the April, a little bit in the
• 10:50
  December and we've been watching on updates.
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  So you'll see the backup, a buck and a half to 2 bucks and you'll
• 10:56
  see the front up $0.50. That is something that's been
• 11:00
  very concerning from the standpoint of traders want a
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  bull market to be led by the front.
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  So we need that cattle right now.
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  We don't need them in February. Is demand strong?
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  Is supply? Sure, That should be led by the
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  front Right here, right now on the back is leading the front
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  instead of vice versa. That's concerning.
• 11:19
  That means they're worried about finding cattle later, not now.
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  There's plenty a lot of times that can signal potential trend
• 11:26
  change coming down the road. If you look at the corn market
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  just a couple of years ago when we were setting up at six, 7-8
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  bucks, you know that did the exact same thing.
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  All of a sudden all the buying went to the back, all the long
• 11:39
  positions up front inevitably where you know guys put their
• 11:42
  profit, exited those and they did not roll them on and
• 11:45
  continue that bull market. So then all of a sudden we build
• 11:47
  a carry in the market, they get out of their lawns in the front,
• 11:51
  the market falls and just continues to ratchet lower.
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  Not a great sign. So that's that's very
• 11:57
  concerning. Another I I'd say concerning
• 12:00
  thing is watching, you know, the bases for the last two years,
• 12:03
  cash to futures, live cattle bases, it's been extremely
• 12:07
  strong. I think it's been positive if
• 12:10
  not 24 months, it's knocking on 20.
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  Normally there's a period in there where that basis narrows
• 12:16
  cash and or futures narrow to cash.
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  And then all of a sudden sometimes you see futures go
• 12:22
  over cash. We haven't seen that in close to
• 12:25
  two years. So now all of a sudden you've
• 12:27
  got that basis changing back to a little bit more normal instead
• 12:30
  of you know, plus 5 + 10 depending on your area.
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  Now all of a sudden, hey, we're only +3 to +5.
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  OK, that's a little bit scary to me as well.
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  I don't like to see that basis change.
• 12:43
  I guess that managed money to get them long, you have to have
• 12:47
  strong cash market to entice new buyers at record high levels.
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  So that's a little bit concerning.
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  And then and then the final piece that you know, I would say
• 12:57
  is concerning in the last 2-3 weeks comes back to just plain
• 12:59
  cash market. You know, it's been relatively
• 13:02
  flat. It seems like we had
• 13:04
  opportunities, you know, for the last 2-3 weeks to push them
• 13:06
  higher and all the sudden one day comes in features erect 6 to
• 13:11
  8 bucks and the Packers are able to squeak through with steady
• 13:14
  cash for the week. So it's very concerning to see
• 13:17
  that that trend, that pattern change to a flat cash market
• 13:22
  instead of a big bull market, especially when we have that
• 13:25
  leverage. Part of that is because of the,
• 13:28
  you know, the kill cuts we've had here in the month of August.
• 13:31
  They have not been aggressively slaughtering cattle that, you
• 13:35
  know, you might claim that that's because the numbers
• 13:37
  weren't there. You might claim that's because
• 13:39
  they were trying to crop auctions up and improve their
• 13:41
  margin. Inevitably it comes down to as
• 13:44
  cash has been mostly flat going forward.
• 13:47
  We get past this week's get on feed and pass.
• 13:50
  Next week you get past Labor Day.
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  Now all of a sudden it comes back.
• 13:54
  Let's see what the consumer can handle.
• 13:55
  I know last time we talked, you know, we mentioned the retailer
• 13:59
  had the ball, had the control. Now all of a sudden that flipped
• 14:02
  again. You know, they, they price
• 14:04
  themselves too high. The consumer kicked back.
• 14:07
  Now all of a sudden, the retailer had to move that meat.
• 14:10
  They want to stay fresh at the store, so they had to drop their
• 14:13
  prices again. Comes the consumer starts buying
• 14:16
  again, cleans up that product. And then all of a sudden, the
• 14:19
  Packers had a lower kill, lower beef offerings to the retailer.
• 14:23
  And now all of a sudden, hey, boxes go on a RIP again.
• 14:27
  So it's it's been encouraging to see the last week's rally and in
• 14:32
  the meat market. But at the same time, I'm very,
• 14:35
  very hesitant. You know, this time of year, you
• 14:37
  get past Labor Day buying, you get back to school.
• 14:40
  You know, pennies can be pinched by the consumer, you know, as
• 14:43
  they're buying school supplies and all that.
• 14:45
  Are they going to come back to that meat counter?
• 14:48
  Are they going to buy more, you know, once we get past that
• 14:50
  holiday? So there's a lot of stuff that's
• 14:53
  concerning here overall. Do I think it's going to
• 14:56
  entirely wreck our cattle market?
• 14:58
  No, it's just stuff that, hey, this could possibly be an
• 15:02
  indicator of a trend change now. We'll see how we act in the next
• 15:05
  two to three weeks. Yeah, it's one of those
• 15:07
  situations. Again, I wish we had a crystal
• 15:09
  ball that we could sit here and be like, hey, this indicator is
• 15:12
  correct and this is going to happen or this is what our fall
• 15:16
  is going to look like. But unfortunately we don't.
• 15:19
  So it's looking at these indicators and trying to stay
• 15:22
  optimistic while at the same time trying to be realistic and
• 15:26
  prepare ourselves for a trend change, a market shift, anything
• 15:31
  else that might come, consumer demand and shift, whatever it
• 15:33
  may be. The million things on the list
• 15:36
  that adjust and change the cattle market and the
• 15:39
  commodities and everything else that can come flying at us at
• 15:42
  any point in time and trying to shield ourselves in any way that
• 15:46
  we possibly can. So any other thoughts or closing
• 15:50
  remarks on that, Dan? Common comments I'm hearing is
• 15:55
  the fact LRPS are so expensive and maybe we've touched on this
• 15:58
  before, Lauren, but the fact is you guys, you know the producers
• 16:02
  covering so many more dollars. So, you know, there, there's a
• 16:07
  rate of, of change there, you're going to see that price of LRP
• 16:10
  premium go up as the coverage that they offer goes up as well.
• 16:14
  So that's part of it. The other big part, LRPS are
• 16:17
  going up in prices. That volatility we've seen in
• 16:19
  the market the last three weeks, it's gone through the roof.
• 16:22
  When you're moving 6-8 bucks a day, options are going to get
• 16:25
  stupid expensive. Since your LRPS are somewhat
• 16:28
  based on those put options. You know, we, we've got to keep
• 16:31
  that in mind. It's still cheap compared to a
• 16:34
  put option. It's still a good tool to use,
• 16:38
  especially at these levels and everything we've just talked
• 16:40
  about. But at this, at the end of the
• 16:42
  day, I I can't do anything about the cost of LRP.
• 16:45
  It's it's probably where it belongs, given the circumstance,
• 16:49
  yeah. Absolutely anything else as we
• 16:53
  round out the podcast today. Buckle up.
• 16:56
  Good luck. What's the we need to put in an
• 16:59
  audio right now of like the thing that plays over the loud
• 17:02
  speakers whenever you're getting ready to go on a roller coaster
• 17:05
  of like pull your whatever, like whatever that is.
• 17:09
  You know what I'm talking about though.
• 17:11
  Like the thing that goes over the loud speakers, it's pretty
• 17:13
  much telling you to like, buckle up, hold on all of your arms and
• 17:16
  legs in the vehicle at all times, like.
• 17:19
  Absolutely, Yeah, this, the sideways pattern I would
• 17:22
  anticipate is probably not last much longer than this week.
• 17:26
  I think inevitably my gut says we're going to break out higher,
• 17:30
  lower starting next week. And at this point, I'd love to
• 17:33
  be really, really bullish and say definitively it's going to
• 17:38
  go higher, but I can't. It's it's.
• 17:40
  Honestly it could go either way at this point with what I'm
• 17:42
  seeing. Yeah, definitely can.
• 17:45
  Well, Dan, as always, thank you so much for your time,
• 17:48
  knowledge, all of the things. I enjoyed today's Little
• 17:51
  educational segment. As someone who knows what the
• 17:54
  heck they're kind of talking about but doesn't really know
• 17:56
  what the heck they're kind of talking about sometimes, I I
• 17:58
  appreciated the little educational segment.
• 18:02
  So I feel more knowledgeable on the topic and I know our
• 18:05
  listeners appreciate it as well. To all of you listeners out
• 18:08
  there, thanks for tuning in and we will see you all tomorrow on
• 18:11
  another episode. Have a good one, y'all.
• 18:13
  And if you are looking at LRPS or anything like that,
• 18:17
  interested in some insurance quotes, we've got that exclusive
• 18:20
  link for you guys down below for our Cattle USA Insurance where
• 18:23
  we work with Dan and his team to be able to provide that for you
• 18:25
  guys. Dan and his team and everyone
• 18:27
  else in the Cattle USA Insurance team are there to answer
• 18:29
  questions if you guys have any. So head on down to that show
• 18:32
  notes link and they'll be able to help you out there.
• 18:34
  We'll see y'all on another episode next time.
• 18:35
  Have a good one y'all.