“Shootin’ The Bull”
End of Day Market Recap
by Christopher Swift
2/10/2025
Live Cattle:
Today's price action falls in line with expectations. By weeks end, the Moore Research seasonality will turn negative into the first week of June. This does not necessarily suggest that afterwards, new highs, or even a test of the old high should be anticipated. Last week, the Restaurant Performance Index went below the zero line. This suggests a contraction in restaurants. McDonalds missed 3rd quarter earning's, and recall that a month ago, it was stated they were going to revamp their value meals to compete more heavily with their competition. All in all, I think that beef demand is starting to be hampered by its high price. As more austerity is practiced in the current administration, the more consumer demand in general will be impacted. Cattlemen have bought and sold cattle at new historical highs as one of the greatest government expenditures was wrapping up and will now be buying and selling cattle going forward in a seemingly more conservative administration, attempting to stop spending.
If tired of paying top price for incoming inventory, try buying them in the future where they are $10.00 cheaper and with a fence options spread, could be bought for $20.00 cheaper than current index reading. Cattle feeders have opportunities that are no longer afforded the backgrounders. Use what is available to you when it is available.
Feeder Cattle:
Basis width will be everything going forward. With few expectations of returning to a negative basis in feeder cattle, how narrow of a positive one can achieve will be the goal. When selling futures, the wide positive basis produces a risk of the spread narrowing with futures moving to the level of the index. If the index does not move, you will lose the difference in the futures. If the cash moves lower, until it reaches the level of where you sold futures, you will lose that premium with no way to capture it. So, selling futures to hedge has significant basis risk over and above price direction. If you just buy a put option, this will limit your derivative risk to the premium paid for the option, but will do nothing to capture the cash premium, and will place a minimum sale floor on cattle that will include the basis spread and option premium minus the strike price. Hence buying a May $266.00 put, for a premium of $8.65, your minimum sale floor will be at $257.35, or $18.24 lower than the last $275.59 index reading.
The fence options spread continues to achieve more than either of these derivatives. Owning the at the money put gives the buyer the right, but not the obligation, to sell the underlying futures. This gives the buyer the greatest probability at that time. Selling a $10.00 out of the money call allows the futures market to rally $10.00 before realized losses begin to materialize. This is a fully margined position with unlimited risk above the short call strike and unlimited profit potential below the long put price. This spread will alleviate the majority of the positive basis spread for which is unfavorable to marketing.
The fear of missing out appears great. It should be because there is too much processing and production capacity for the number of animals available. With a belief that the beef/dairy industry controls approximately 18% of cattle on feed, and Wal-Mart approximately 24%, that only leaves 58% of inventory open. Of that, you know that there are a few large operations and yards that will take up a large swath of that 58%. So, consider that there are fewer cattle, and about the same number of operations still in business with excessive processing capabilities. I saw where the Oklahoma Stockyards is selling. The more vertical integration that solidifies, the less need for brick and mortar barns. I would expect this to go into real estate development over continuing as a stockyard. A conversation today suggests sale barns may not go by the wayside all together, but will continue to contract instead of expand.
Class III Milk:
Milk was sharply higher today. I expect milk to continue higher. I recommend owning milk futures and December call options on milk futures. This is a sales solicitation.
Corn:
Corn was higher and beans lower. I expect both to trade higher. Severe drought in India may be some of the recent strength. While I do not want to be short wheat futures, some cash sales, while above $6.00, may look like a good place to have started.
Energy:
Energy was higher today. After Friday's near capitulation of being bullish energy, it perked up today. While not out of the woods yet, but I believe that weaker oil will be a signal of weakening demand, not increased supply, and higher oil will be a good economic signal, or potentially further disruption of foreign oil production.
Bonds:
Bonds, and most notes, were soft today. Inflation continues with more reports this week to show if still intrenched or subsiding. Gold made new highs and copper has really increased in price the past two weeks. The practice of austerity can be difficult and painful, but it appears that Trump is up to the task of reeling in the untold frivolous spending of the past 4 years administration.
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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