subject: A Commodity Strategy Involving A Futures Strategy To Go Long Commodities Must Include Cattle [print this page] We are seeing a decline in net long positions for futures across the board including crude oil, sugar, and wheat by double digit percentage points. Not all commodities are losing ground though with the fiscal cliff looming. Cattle which I would imagine would go down if the economic outlook id poor because beef is expensive too eat is actually gaining ground, but why?
Well there are other factors to commodity prices than an economic outlook and what will happen to demand. Commodity prices are also affected by supply. Simple economic theory of supply and demand; traders need to examine both and calculate price accordingly. The supply in beef is currently being affected by a draught. The draught did not directly affect the cattle, but the crop used to feed cattle which are corn. The price of corn sky rocketed due to the worst draught in more than sixty years. If the price of feed increases it increases the cost of production or fattening the cattle for slaughter. The U.S Department of Agriculture says Beef production will fall 5 percent to about 24.68 billion pounds. The U.S herd was the smallest in more than 40 years, factor in population growth and it appears we have a serious supply issue.
The February cattle futures reached $1.337 a pound which is the highest price for a delivery month. Feeder cattle were up to $1.5425 a pound. This is simple economics; if the price of production increases enormously there will be less production therefore reducing the supply enormously. Even if demand does drop due to an economic downturn caused by the fiscal cliff it would have to make up for the decrease in supply to stabilize the price and prevent a continued increase.
Traders can use more than one futures strategy to profit from a continued rise in cattle prices. One futures strategy is buying outright futures contracts. Another would be buying or selling options, a trader can do a mixture of both and create different risk scenarios. If an investor cannot trade their own account but would like a commodity strategy in their portfolio such as the future market they can choose one or more of many commodity trading companies. Commodity trading companies will trade a commodity strategy of their choosing. These companies are also referred to as commodity trading advisors, or CTAs. By going with a CTA an investor is investing with managed futures. Managed futures are futures trading accounts managed by a professional money manager called a CTA. These accounts are opened with a Futures Commission Merchant or what is known as a clearing firm. They can be opened directly with the FCM or through an introducing broker. The funds are held with the clearing firm in a segregated funds account and power of attorney to trade the account is given to the CTA. The CTA has the ability to place trades and does not have access to customer funds. Customers can choose a CTA based on the market they trade or their strategy. They are also provided a track record and disclosure documents outlining the strategy, track record, and fees. For information please visit http://www.cedarassetmanagementllc.com
