The Market's Fine Print

Cattle Volatility Andy Warhol Would Have Loved

Andy Warhol's posters and portraits always struck DTN Livestock Analyst John Harrington as over-caffeinated and stuck on fast-forward -- not unlike a random stroll across Chicago's trading floor. (Andy Warhol Marilyn Monroe by MichaelPhilip; public domain)

If Andy Warhol had spent more time trading cattle at the CME and less on weirdly coloring photos of Marilyn and tomato soup cans, the "king of pop art" might have been known for more practical wisdom.

After all, he wasn't that far from saying "in the futures, everyone will be right for fifteen minutes."

There was something about the extreme volatility of live and feeder contracts this morning that caused me to reflect upon the strange Warhol world where all impressions and expressions seemed to be on the run. I'm no art critic, but Andy's posters and portraits always struck me as over-caffeinated and stuck on fast-forward.

Say, not unlike a random stroll across Chicago's trading floor.

Some margin-call veterans who perhaps find "Dogs Playing Poker" more worthy of admiration will no doubt scoff at my sudden revelation. Declaring livestock futures "volatile," they may smirk, is about as insightful as calling fire "hot."

But I'm fully aware of the board's well-earned reputation for aggressive choppiness and wild price swings. Surely we can all agree that, as a general rule, significant volatility goes with the territory.

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Yet anyone who thinks recent price chaos is just par for the cattle course hasn't had a club out of the bag in a long time.

Week-to-week price shifts in 2014 have been historically huge. Specifically, the average weekly price change (i.e., either higher or lower) in live cattle futures through the first eight months of the year totaled $2.29, up from only $1.08 in 2013 and $1.42 in 2012. Similarly, the average weekly price change in feeder futures over the same period totaled $2.45, up from only $1.78 in 2013 and $1.86 in 2012.

The intraday report is even more impressive in this regard. Taken together, live and feeder contracts so far this year have scored more 300-point daily ranges (i.e., from session low to session high) than at any time since at least 2003.

In short, cattle traders find themselves in a market of unprecedented price flux. Thanks to long-term trends, bullish prognosticators probably sport a better batting average than their intrepid counterparts. Yet depending upon when you snap the selfie, chances are indeed good that "everyone will be right for fifteen minutes."

So what's behind these massive mood swings?

The first shake of my finger goes in the direction of price history in the making. Breathtaking vistas looking down on the ordinary can cause both exhilaration and airsickness. Never-seen-before price levels understandably engender double-edged nervousness. Is the market selling the first ticket to a new party or the last ticket to one already over?

Yet to put a finer point on the ongoing slugfest, cattle futures are torn between two realities; 1) feeder and fed supplies are the smallest they've been in decades, a fact of life that won't significantly change for several more years (at the earliest); 2) absolutely no one knows how high beef prices can go before even the most dedicated carnivores trolling Safeway and Wal-Mart will say "enough is enough."

On one hand, the market is supported by traders who see this first reality as the untrumpable trump. Other specs and commercials simply believe the resolution of the second is only a matter of time.

Barring definite confirmation of substantial expansion in the pork and chicken sectors, I don't see price velocity decreasing in the cattle pits anytime soon. Both bulls and bears know all too well the danger of daring to outwait the other.

Indeed, their reckless bravery reminds me of another Warhol quote: "I'm not afraid to die; I just don't want to be there when it happens."

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

(AG)

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