“Shootin’ The Bull”
End of Day Market Recap
by Christopher Swift
9/19/2023
Live Cattle:
It's really getting interesting now. The increased, historic, capital requirements to produce a pound of beef, coupled with having to manage price risk, inherent in livestock production, with a Federal Reserve tasked with combating inflation, is a lot for anyone. To add a little salt to the wound, I've yet to have anyone tell me how feedyards are full, with cattle feeders falling over themselves to own inventory, that supposedly isn't there. If the inventory is not there, then how are pens full? If there are empty pens we don't know about, then how will they be filled if we have not seen the low end of supply yet? Lastly, the price discrepancy in comparison to supplies lost, or demand gained, is seemingly very skewed. Where is the shortage? Sept. '18 11.1 million head on feed, Sept. '19 11.0, Sept. '20 11.4, Sept. '21 11.2, Sept. '22 11.3. If the trade guess is right, and the on feed is 97.8 of last year, that is 11.0. I am not seeing the decline of cattle on feed in anything like the 119% price increase. Is there cowboy math I don't know about? What have I missed? The fundamental picture appears very skewed with such minor changes in on feed and the herd size in comparison to price movement. As well, if there is any truth to the shortage not coming until another year from now, are we due another 119% increase from here? How much empty pen space can be managed for at least 2&1/2 years? If liquidation has yet to cease, then just pick the day it stops and it will be 1&1/2 to 2 years before those go into the timed production schedule. I don't know of a more fascinating industry than this one.
Feeder Cattle:
Today is day 3 of exceptional price fluctuation. To the front end, the top is believed made from Friday's high. Monday's sell off, and this morning's rally, is believed to have formed the most minor of waves 1,2, and 3. To the back months, the double top, or new contract high, is believed to have topped the back end today. Cattle feeders have to have fat cattle prices move sharply higher in order to return input costs. They will have to go even higher to profit from. Unless feeder prices drop significantly, fat cattle prices rise significantly, or feed and other input costs drop dramatically, and quick, the cattle feeder is calculated to be producing in the red by years end. Throw on top of all the production issues a Federal Reserve tasked with combating inflation, and this fundamental time frame appears elevated in risk of adverse price fluctuation. Lastly, there has been a "risk on" environment the past 3 months. Funds are believed to own 25% of the long positions in the feeder cattle market, via the CME commitment of traders last Tuesday, Sept. 12. With funds having no allegiance to any commodity or industry, if they turn tail, you have not seen anything yet.
Corn:
Corn was firm and soybeans soft. Corn doesn't want to go down and beans don't want to go up. However, the fundamentals of both suggest just the opposite. Nonetheless, harvest is underway and will move quickly as the weather seems near perfect. The leg down in beans is believed the wave 2 continuing to unfold. As the belief is that corn is abundant and beans not, I recommend marketing corn and either storing beans, or marketing corn and beans and buying bean calls. This is a sales solicitation. The carry in corn can have you spread out your marketing's, but there is little to no carry in the beans. Therefore, storage could allow for benefits of beans moving to full carry, or the price rise were issues in South America to occur. Regardless, there is not anticipated to be much change in the crop size in corn, and lower in beans.
Energy:
Crude has made a new high for 8 days in a row. With no changes in policy, there shouldn't be any changes in price direction. The buzz of a slowing global economy is starting to go around. I think this will impact energy, but not just yet. A correction of significance won't surprise me, but I don't think it would last long. Scheduled maintenance in October at some refineries could limit diesel fuel production for a couple of weeks. With airline traffic still at historical levels, and the combines rolling, diesel fuel is in demand.
Bonds:
Bonds are lower, and nearing contract low. The Fed is tasked with lowering inflation. The tools used are raising interest rates that tend to have more impact on businesses and large purchased items than day to day consumer spending. The higher rates are believed to have slowed job and wage growth, but done little to curb consumer inflation. The current bout of inflation is believed, just what the Dr. ordered, to decrease discretionary consumer spending. The combination of increased consumer spending, due to commodity and necessity inflation, and the raising of rates, to slow businesses down, is anticipated to culminate into a very weak economic time frame. This is what the Fed wants, and whether they achieve their goal or not, I believe they are more than willing to accept the consequences that some may not make it through this. Just keep thinking about the 119% price increase of cattle on a 6% decline in supplies.
This is intended to be or is in the nature of a solicitation. An investment in futures contracts is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of the margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources and other relevant circumstances. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
On the date of publication, Chris Swift did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.