“Shootin’ The Bull”
End of Day Market Recap
by Christopher Swift
1/24/2024
Live Cattle:
In my opinion, the cattle market is attempting to ration the number of producers and processing capabilities for the amount of inventory available. As there is too much of both, and not enough animals to go around, the attempt to run at 100% is causing the price to rise. With seemingly little concern for risk, I looked back at corn and where corn farmers are today, and what they could have done in the past. In April of '22, corn prices peaked. The December of '22 on that same date was $7.66&1/4, Dec. '23 $6.79&1/2, Dec. '24 $6.02 and Dec. '25 $5.80. Farmers could have sold three years of crop for significantly higher, with a $1.52 higher than where the lowest priced '25 contract was at that time. Cattle futures are nearly completely inverted and there is no carry charge in cattle like grains. It is a front-end-led cash market with no expectations of futures traders offering premium, as it would be anticipated producers would initiate a large transfer of risk from themselves to the futures market. I think recognition of what is transpiring may help to decipher the next most probable move. First and foremost is believed the 6 trillion dollars and forgiveness programs doled out over the 4-year time frame as allowing those who were not necessarily able to afford beef, and other items, could. The subsidy programs, drought payments, and PPP handout gave producers and processors money to expand, to produce more beef. However, no one has started to increase production, they have simply made more room for something that is not there, and may not come for quite some time. This factor was noted in Orlando last week, but it really came to light when having breakfast with an employee of Hershey's on Thursday of this week. His comments on the supply chain disruptions were that the excessive demand caused by increased spending, accentuated the issues of supply. Were the great demand to have not surfaced, there would be no shortage of Cocoa. I think beef demand coincides with this. Had that money not been given out, the supply issue would not be as dire. It was doled out and we are left to deal with the consequences of. Directly to beef, is the aspect of the farmer feeder. With cost of gains under a dollar, and some under $.50, the price they can pay over a commercial is significant. As well, there is a thought process that farmer/feeders are attempting to make up lost grain revenue on feeding out cattle. Hence a new twist for which a great number of these participants will be gone come spring planting, as well as, the risks being assumed are great, and on top of a poor price for crops. These factors lead me to be even more stringent in managing risks you are assuming. So, there is estimated to be over 200,000 head of cattle waiting to be trucked across the border, over 12 million people to move south across the border, the spring will be filled with wheat pasture cattle to either market or find summer grazing, with farmer/feeder production marketing's March through June. When I listen to President Trump detailing how he will reverse the Biden administration spending spree, I have to believe that as excessive government spending turned transitory inflation into entrenched inflation, his actions could bring inflation out of the trenches and begin to deflate items. There are two ways to improve or quell demand. One is to increase supplies to meet the demand, with the second, raising prices to levels for which fewer can afford the product. At present, we are testing the limits of the resilience of the consumer, and desire to remain in the cattle business.
The extent of the rally in cattle has begun to have financial ramifications on all participants. For some, it has emboldened them to take greater risks, and others, fear of ramifications of adverse price fluctuation. Knowledge of how your hedge will impact your marketing is essential to keep from doing something wrong or on the spur of the moment. First, the reason you hedged at the time was a belief that you could not afford the risk of a lower price. In hindsight, the price did not go down and now you have a marketing price significantly lower than current cash. That is great as current cash gains supersede the increase of futures contracts. If the cash market remains elevated, you will be assured the minimum sale price, and may be privy to a percentage of the higher cash price. From December 30, the feeder cattle index rose 9%. March futures rose 4% and May 3%. Hence you are still gaining on all unhedged cattle, as well as hedged. Taking action on, actions that have already been taken, can produce unintended results that need to be known before doing such. The aspect of hindsight, on missing out, can cause some to liquidate positions for which could significantly increase risks more than at present. Assuming a realized loss of several dollars, in hopes of recouping those by ignoring risk management, is believed unwise. You are in a fundamental change of the cattle industry in which there is an attempt to lower the amount of production and processing capacity to the number of animals available. Any aspect of expansion would exaggerate this to a point in which only a few, well-funded corporations would be in control of the markets. This has been noted multiple times over the past 18 months. So, above is believed the situation, with no real insight to the outcome, other than, if you increase supplies, the price will plummet and if you kill the demand with high prices, the price will plummet. As stated last week, the wall of worry for '25 is that we are not worried enough.
Grain prices are anticipated to continue to rise into the spring. So far, there appears little disruption in spring planting ideas. I continue to believe that were a farmer to buy the December calls on corn and November calls on beans, at a strike price desired to make cash sales, they would have the courage to make difficult sales decisions in a much more favorable price range and knowledge of still being long with a limited risk derivative. This is a sales solicitation. Energy prices spent the week in correction mode. Diesel fuel offered producers an opportunity to top off farm tanks or book some spring fuel needs at a slightly lower price this week. I continue to anticipate energy to trade higher. With US oil production at top levels, I am unsure companies want to drill baby drill. Interest rates may have topped for a little while. I expect bond and note prices to gravitate a little higher to help narrow the wide spread between the Fed window and retail rates. The moving parts appear to be moving a little faster with continued expectations of a reduction in government spending to impact a number of markets.
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.