On Friday, August 16th, live cattle and feeder cattle futures took another major dump lower. Feeders posted fresh contract lows and finished the session sharply lower. Live cattle traded sharply lower, but most contracts did manage to recover off the lows into the closing bell. The most active December live cattle settled 160 points off the session low but still down 250 on the session. It appeared the lion’s share of the selling was likely a reaction to the Vice President Kamala Harris' remarks about price gouging and her plan to freeze food prices. Her speech, given Thursday evening, also outlined rent controls and cash payments made to first-time home buyers. She is a true believer in socialism.

The cattle fundamentals did not appear to be nearly as negative as the futures action. The cash steer trade for the week occurred at $1.85 in the south, down $1.00 from the previous week. Cash trade in the north occurred mostly at $1.90 and $293.00-$298.00 dressed. I’ll call this down around $5.00 from the week prior. The beef traded higher for the week with choice up $4.74 and closing Friday, August 16 at $317.45. The result was a vast improvement in packer processing margins, now approaching break even. October and December live cattle futures are trading more than $8.00 under the cash steer market. Is this justified? From my fundamental perspective, the answer is no. However, live cattle futures have become the focus of huge hedge fund and algorithmic trading specialists. These sharks thrive on volatility and thanks to the expanded daily ranges allowed by the Exchange, huge moves in prices are now occurring for little or no reason.

The volatility is driving participants out of the feeder cattle futures market, with open interest declining substantially. Producers are moving into the LRP program as a result and a serious liquidity problem will likely develop down the road in the feeder cattle futures market.

As a fundamental analyst, I am bullish live cattle prices from a long-term perspective. However, clearly the recent futures market action does not coincide with my fundamentally bullish outlook. My response to the sharp three-day selloff that occurred in tandem with the sharply lower move in the stock market, as triggered by the interest rate hike by the Bank of Japan, was to whittle bullish cattle positions in half. Since then, my advice has been to do nothing. That’s easier said than done, as every day we have clients that want to re-establish their bullish positions. Until I see improvement in both the technical side of the market and in the cash steer market, my advice is to hold only half a bullish position.

The USDA will issue a monthly “Cattle on Feed” report on Friday, August 23. I’m expecting lower placements on this report. Many in the industry believe the monthly on-feed reports have somehow been double counting placements in the feedlots. This has resulted, many feel, in an overstated on-feed inventory. Solving the puzzle of the cattle market has become a major headache. In the end, a dramatically reduced cattle supply will continue to drive prices for live cattle and wholesale beef higher. Exactly how we get there, and when, is largely unknown.

Dennis Smith publishes his widely followed evening livestock wire daily. This information is available for a free 30-day trial by email request to [email protected].