“Shootin’ The Bull”
End of Day Market Recap
by Christopher Swift
1/14/2024
Live Cattle:
Price action and profit margins were the reason I put out a second commentary today to subscribers. If doing a little back tracking, cattle finished in April were placed between $250.00 and $255.00 via the feeder cattle index. Fat prices have risen sharply, along with futures. However, seemingly futures traders remain hesitant to push premium on to the market. I believe due to a factor of transfer of risk at a premium. Hence why we see futures now stagnating as has cash, for the time being. With a belief there is a large profit margin in cattle delivered in April, today's price action of futures is allowing the transfer of risk at a slight discount to cash. I highly recommend you consider this for two reasons. One, there appears a sizable profit margin, and two, that profit margin can be reduced to a loss were risk of adverse price fluctuation not managed. On the mid day cattle commentary, I recommended buying the at the money $199.00 put and selling the $205.00 call for an approximate premium of $2.70. This is a sales solicitation. This spread, if one can live with the consequences of, will produce a minimum sale floor at $196.30 and a maximum sale of $202.30.
Second thing to note is how skewed the spread between starting feeder and finished fat is today to the June and August futures. I used the index and June futures and the March feeders to the August fats for the spreads. They may have been wider in the past, but at over $80.00 starting spread at present, I can't recall it. The charts below shows how much there is to overcome in the purchase of just the feeder steer, not including all inputs to produce a fat steer. In my opinion alone, not to be confused with fact, but there appears no more reliance on the performance or fundamentals of cattle or beef to improve or detract from price. In my minds eye it is but a singular factor, the consumer. Whatever the consumer can or cannot afford going forward will be the judgement of beef/cattle prices. Cattlemen have bought and placed cattle with little to no profit margin without further significant advancement of price. Therefore, most of the end results will now be in the hands of the consumer. I find this a unique position for the cattle industry to be so reliant upon the consumer's ability to maintain spending at this elevated level of inflation, with expectations of the consumer increasing spending capabilities.
Feeder Cattle:
Take a look at those charts below of the spread between starting feeder and finished fat. How much wider, or for how much longer, will one subject themselves to what appears as poor feeding margins? What I do know is that backgrounders and under are going to have a very difficult time managing the future. The positive basis is a curse for backgrounders at the moment with many more cattle to sell in the spring, but the highest price today. Backgrounders are finding an over $19.00 spread between the index and an long options trade if buying the at the money May put for a premium of $9.22. In other words, the index will decline over $19.00 before your hedge becomes profitable at expiration. That is a huge amount of risk to assume when needing to market inventory in the future. Futures traders are no longer the friend of the backgrounder. You must know that this can get a great deal worse than at the moment, simply due to having already subtracted the option premium, the basis spread is about $9.00 to $10.00 positive. Therefore, to go out $20.00 to $30.00 wide positive basis spreads has the potential to make this a very applicable hedge. Don't think for a minute that it "can't" do this. It is a futures market filled with participants that have no loyalty to the cattle market, as well as a belief there are some significant Texas hedges out there. I recommend you be overly cautious about the assumption of risk at this time in the cattle market.
Hogs:
I still don't know why hog futures are so stout with pork production still slated to be elevated. Increased exports may help some, but there has been some rumors of consumers swapping from beef to pork. That may be true to an extent, but none of the three burger chains sell pork patties. As well, there is such a huge cooking difference in pork and beef that one can't be replaced with another in multiple meals. I continue to believe the consumer the hinge and it is squeaking loudly.
Corn:
Grains were mixed. I expect a higher price in soy, soy products, and corn. I am unsure on wheat, but may at least not go down if corn and beans move higher. Corrections in either will be viewed as opportunities to add to or initiate long positions in. Producers continue to stare at increasing input costs. With the ability to fix some of those costs, we can help you achieve this.
Energy:
Energy was mixed today. After the large run up, I can see a couple of days of volatility. The rally has started though and contract highs are clearly in sight. Energy is a world market with the US only a player and not the referee or owner of the team. Therefore, the woefully inept energy supplies to Europe, Russia fighting a war, and Israel disrupting the middle-east, energy is anticipated to continue to trade higher.
Bonds:
Interest rates were higher again today with bonds making another new contract low. This is as clear of a message as can be sent, "stop buying things on credit". The US dollar's strength is believed a safe haven from the continual rise of muslums in Europe. The US is believed just days away from finally stopping the dilution of our country, leading me to anticipate a reduction of government spending that has done nothing to build or strengthen the economy. Although a long road to have to recover from, I see good things taking place already. Gold was a little higher, but with a potential slowing of Chinese buying, and maybe, just maybe, some of the inflation going to subside as it impacts consumers discretionary spending habits further, it could take a sizable break lower. If it continues to appreciate during the current bout of inflation, a new contract high is not out of the question. I think we will need to see a few months go by to see what can be enacted and maintained to reduce illegal immigration, strengthen the US economy, and maybe curtail some inflation.
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.
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