“Shootin’ The Bull”
End of Day Market Recap
by Christopher Swift
9/3/2024
Live Cattle:
Futures traders teased at higher prices, but at the moment, I think it unlikely a futures trader would pay more than the current index reading. A tale of two cities is being created. The front end is chocked full of expensive feeder cattle on feed that are losing money exponentially as the price placed continued to rise and the price sold continues to decline. The front end has ample cattle on feed and at elevated weights, producing more beef year over year than anyone, except Swift Trading, ever believed. We did, as we have written extensively about the agenda and the goals to be achieved. However, this agenda has come at a great cost. Not only are producers having to continually deal with cattle at elevated prices, those prices have stagnated from moving higher. With the final front end issue of equal year over year beef production, this is where it starts to get interesting. I think the market is very front end loaded with cattle and beef production out to the first of the year. After such, the nearing an end to liquidation and nearing a start to some form of expansion will curtail cattle numbers further. As the unintended consequences of lower dairy heifer replacement has come to light, the end of this year, and all of next will be as exciting, if not more, so than 2024. With it unlikely that traders will push futures prices above cash, your goal is to achieve the closest price to cash when making sales. Today pushed October to within $2.00 to $3.00 of cash and December to within $3.00 to $4.00, depending on whether using north or south as cash basis. There are thoughts of a weakening economy, for which some stout market movements today helped to confirm. Energy the number one as it plummeted across the spectrum today. Gasoline was the leader and it is the fuel source of the consumer. We already made note that diesel fuel, the energy source of commerce, was failing. We even noted it trading under gasoline. Now, all three are at new lows from contract high and the weekly continuation chart on crude suggests to expect $10.00 to $15.00 lower in crude prices. Were this weeks Unemployment data to be backwards, I think it will be confirmation as to why energy and cattle prices are softening.
Feeder Cattle:
Since the division between bulls and bears remains in stark contrast, attempt to avoid both. How? Since it is not believed that futures traders will put premium on to futures contracts for producers to market into, one needs to start picking prices they can live with or be happy with. I do understand how difficult it must be attempting to do such when just a month or two ago you could sell cattle for $20.00 higher in the future than had ever been traded in history. Now you know though how important basis is. With it positive, you will now begin to learn how much more difficult it will be marketing at a discount than with premium. Nonetheless, you still have to market and although you are locking in a lower price in the future, for all you know it could be the highest price the future presented. While few wanted to cap their upside potential when there was scads of premium to work with, imagine not wanting to limit your upside now. However, that is pretty much what you need to do. Why? In my opinion, it is the need for the highest minimum sale than highest maximum sale. If you spend the full premium for a put option, you are either assuming all of the risk incurred by the premium of the option and if you chose to buy an out of the money option, you are then assuming risk of premium and spread of underlying futures contract to the strike price. In other words, you are assuming a lot of downside price movement in an already discounted market. Don't do that. If you are going to sacrifice something, do so to the upside. Give up some of the higher trading to secure a higher minimum sale floor. Long way around the barn, but what I am advocating is for you to use the same hedging strategy as when there was premium available. The reason for is to obtain a higher minimum sale floor and attempt to sell the short call option strike at a level that you can live with if achieved. This may sound painfully grueling as the fundamental change in basis has you having paid too much for incoming inventory and nowhere in the future to market at a higher price. However, I believe it a better way to market than paying large premiums for at the money put options, you assuming more risk with an out of the money put option, or doing nothing at all. I recommend you pick a basis spread you can live with and then buy the at the money put option and sell the out of the money call at a strike you can live with if met by the underlying futures contract. This is a sales solicitation.
The Hare continues to keep the Tortoise in sight. When futures move closer to taunt the cash market, I would expect futures to then move well away from the cash, believed still slowly moving down the trail towards the $215.00 area made in December of '23. Keep in mind that you have not seen anything yet, if the economic numbers turn cold. The $20.00 decline of the index was seemingly quite methodical. Futures on the other hand plummeted. Look for both cash and futures to move sharply lower were economic signs to cool.
Hogs:
Hogs continued higher, but not before a good shaking of the tree to see how many bulls would fall out. A few did, but seemingly just started climbing back up. The basis spread remains wide in hogs with a great deal of convergence left.
Corn:
Grains and oilseeds were higher today. Yes, I should have held on to the $4.10 corn calls, but most likely, if they were held, some would have exited on the lows instead of at the higher level. Regardless, there remains a great deal of crop to market and this rally could fade as quickly as it started. Meal continues to have my undivided attention. Now that it has started to move higher, end users will get busier trying to stave off an even higher price. I don't think much hinges on the US crop, with seemingly all eyes on South American production.
Energy:
Well, it took long enough to finally happen, but energy is sharply lower and has broken out to the downside. Note that through all of the volatile trading, it went up when overseas issues arose, and plummets when they settle down. This leads me to believe that down is the path of least resistance for energy. Diesel was noted as the weak link months ago, and as the energy source of commerce we noted the impact this was foretelling. Then the volatility came with the overseas disruptions and gasoline shot higher. Now, gasoline is leading the way down with crude oil hot on its heels. This suggests a weakening US consumer as gasoline is the fuel source of the consumer. So, here are the signs and signals of a weakening economy, I recommend you prepare as best possible.
Bonds:
Bonds produced an outside reversal. After trading weak all last week, it culminated at the low made over the holiday weekend. Trading higher for most of the session, I am disappointed in having been stopped out of previous long positions rolled into December last week. I continue to believe bonds will move higher and recommend buying December bonds at 123'17 with a sell stop to exit only at 122'16. This is a sales solicitation. Only the DOW made new highs in the big three equity indices. The old saying is you need two to keep the rally going. Many have noted the move from the rocket ship stocks of the S&P and NASDQ, to the more grey haired stocks of the dirty thirty. With today's sharply lower price action from within a few dollars of historical high, I have to believe that some investors are not seeing the earning's potential they once did. Especially if consumers do have to pull back on spending. Note they have not as inflation continues to run at 3%. Until that number goes negative, nothing has stopped going up. If at only 1%, it is still rising at a one percent rate of gain. Since we have not seen a negative number in quite some time, I recommend you get prepared for it.
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.