Cattle Futures Rebound After Mad Cow Scare

OptionsXpress
updated | Author's Website

Monday, April 30, 2012

Given the steep sell-off seen prior to the “Mad Cow” report, the panic selling on the day of the USDA announcement may have been a “selling climax”, with prices now at what appears to be oversold levels. Some traders who are expecting a rebound in prices may wish to explore buying bull call spreads in Live Cattle futures options. For example, with the June futures trading at 112.700 as of this writing, the 114 calls could be bought and the 118 calls sold for 1.250, or $500 per spread, not including commissions. The total investment in the spread would be the maximum risk on the trade, which has a potential profit of $1,600 minus the premium paid, which would be realized at option expiration in early June should the June futures be trading above 118.000.

Fundamentals

It was a tough week for those long Live Cattle futures, as prices were already hovering near yearly lows when on Tuesday, the USDA announced that a case of so called “Mad-Cow” disease was found in a dairy cow in California. This news caused Live Cattle futures to plunge the daily 3.000 limit in all 2012 contracts months, as many traders remember the carnage that occurred following a previous scare back in late 2003. In the most recent case, the bearish reaction may have been overblown, as the USDA stressed that no meat from the affected animal had entered the food supply. The biggest wildcard will come from the reaction of major U.S. beef importers, such as Japan and South Korea, who back in 2003 banned U.S. beef imports for many years — and some markets, such as China, still severely limit U.S. beef imports. Many analysts currently do not expect a temporary ban to occur in this isolated case, as long as there are assurances that the infected animal did not enter the food supply. Any drop in U.S. beef demand due to this scare should also be short-lived, as long as this remains an isolated case. Some more aggressive traders are looking at the panic selling as a potential buying opportunity, citing the futures discount to cash market prices as well as higher cash beef prices, which should help to support prices in the coming days, especially if no further cases of “Mad Cow” are discovered.

Technical Notes

Looking at the daily chart for June Live Cattle, we notice prices trying to form a bottom after the steep sell-off seen early last week. We do see what appears to be a bullish divergence forming in the 14-day RSI as this indicator emerges from oversold levels. During the major price decline that began in early March, the 20-day moving average has acted as strong resistance, and this once again appears to be the case. Thursday’s low of 111.550 is the next major support point for the June contract, with resistance seen at the 20-day moving average, currently near the 115.225 level.

Mike Zarembski, Senior Commodity Analyst

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