Shootin' the Bull about divergence.

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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6/10/2024

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Live Cattle:

I don't think the corn belt classic brought the stupendous prices most expected.  The futures big gains and seemingly none in the cash markets leads me to believe that simply some divergence took place today.  I think the cattle feeder is the one to watch.  If they don't bid higher, and the futures trader already having shut the windows of basis, it may be that feeder cattle prices are too high.  I think it has boiled down to a very simple conclusion.  If the cattle feeder bids inventory higher, against themselves, then it will signal the industry is going into the final few phases before vertical integration produces a supply line that is stronger and more resilient than outside of.  Once accomplished, those remaining outside will have to be either huge, or go out of business.  The flip side is that if cattle feeders have already had enough of bidding higher, then I could see feeder cattle prices breaking $15.00 to $20.00 lower and push further changes to the industry in to the first quarter of next year.  So, again, the cattle feeder is believed holding the key.  Do they keep the lock on and try to keep as many as possible in business, or turn the key, blow the top out of prices and let those remain have the pieces left.  While difficult to assess the industry as a whole, watching the last couple of years has helped to decipher that consumers have made massive shifts in discretionary spending in attempts to live within their means.  The packing industry shifted once in a big way back in 2011 - 2014 when they bought out and mothballed multiple slaughter plants.  The past two years they have prepared for greater carcass weights and a time frame in which fewer cattle would be made available for slaughter.  Today, they have reduced  kills in a manner that increases beef production to within less than 2% of previous year with as much as 4 to 8 percent fewer cattle.  This control of slaughter pace has, as well, increased box beef prices, helping to return profit margin. What has the cattle feeder done?  Few have entered into a vertically integrated supply chain while the majority continues outside of.  Hence, the cattle feeder has done very little with two factors staring them in the eye.  One is that there are fewer cattle to feed and they have not reduced pen space at all, and second is that prospects for growing the herd back are not much more than stabilizing it or maybe within 2 years, reach back to the previous low.      

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Feeder Cattle:

Backgrounders no longer have the consumer to help argue higher prices.  The consumer has turned tail and is not expected to increase expenditures on much of anything going into the elections.  Backgrounders don't have the support of the packer, as they are attempting to reduce incoming prices, and high feeder cattle prices don't help from the start.  The sector that hasn't made a change, hence still paying top dollar for incoming inventory, is the cattle feeder.  So, reliance upon them becomes crucial to maintain the premiums of feeder cattle.  As the next few weeks are when a large amount of the years volume is sold, one can only root hard for the cattle feeder to bid high and bid often.  Obviously, some believe they will, and maybe or maybe not, jumped the gun this morning.  Nonetheless, I am under the impression that vertical integration is a goal and the current increase in beef production, with fewer cattle, will help to achieve this goal.  This is believed a separate goal from just running out of beef and destroying beef demand.  The goal to keep beef prices from soaring out of reach of the consumer is believed the most crucial at the moment.  The goal of a vertically integrated supply chain in beef is second, but running very close.  

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Hogs:

The lean hog index is a tad lower today at $91.75, but basis has been converged and without a substantial move expected in the index, or forethought of, there isn't much to expect in hog trading at the moment. 

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Corn:  

Up a quarter of a cent in new crop beans and corn is about as non-exciting as it gets.  Both are believed still in bear markets with the drought monitor almost solid white in the corn and soybean belts.  Wheat is being harvested and it looks good.  Maybe some rain or wind damage, but the crop itself appears in good shape.  

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Energy:

Energy was strong all day.  Very few corrections within the day and right back to bidding it higher. I don't know why.  Of the only reason I can think of, off the top of my head, is that with the employment data continuing to be stout, this may be some reason for the persistence of the buying today.  If it was short covering, there was no time frame in which the selling picked up.  So, I don't think it is short covering.  

Bonds:

Bonds are lower as there has been no changes in the stagflation. Half the year is nearly over with and there has been no let up of the inflation.  I re-watched the movie, "The Big Short" again on Sunday afternoon. I continue to find it utterly amazing that each of the participants in the movie were correct, but that the banks, banking system, and Standard & Poor's rating services were so crooked that even when dead right, it was difficult for them to profit.  Some see similar aspects to our economy today.  I think a great deal of it is government spending with most citizens having to make some form of shifts in discretionary spending to keep the inflation from robbing them blind.  So, while a great deal may be correct on the assessment of the economy, it doesn't necessarily lead to making money.  Hence I believe where the statement comes from: "the markets can remain irrational for longer than one can remain solvent."  

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