Shootin' the Bull about competition heating up

“Shootin’ The Bull”

by Christopher B Swift

​8/12/2025

Live Cattle:

Futures traders made an attempt at narrowing basis, but not by nearly enough to keep cattle feeders from assuming the lions share of basis and price risk.  Especially with continuance of widening the spread between starting feeder and finished fat.  A comment read today suggested there won't be enough cattle for the next go around, therefore, a great deal of empty pen space will become available, or may not be needed at all.  Packers are throwing everything they can at the market, but maybe this week they have done what needed to be done.  That being, push the price right to the consumer and let them make the choices.  I would anticipate grocers and restaurants to absorb less of the margin risk and simply pass the higher price along to the consumer.  At play there would be the potential for loss of consumer demand.  All of the above may become a moot point were the protocols to have been strengthened to a point in which the border is open sooner than later. ​

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Feeder Cattle:

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The challenge of getting ahead of the curve video.

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Cattle feeders climbed over one another to bid feeder cattle higher, and higher against the fat market, with the aspect of cheaper cost of gain.  In doing so, they have pushed the spread between starting feeder and finished fat to a new historical width of the index and fat futures, and within a $1.25 of the high made between September feeder/February fat spread.  In my opinion alone, this is a tooth and nail fight for market share that alludes to the deep pocket's theory.  Only those with deep enough pockets can enter into a widening negative margin spread with a positive basis for which some portions of price risk cannot be managed. 

This is on the cusp of getting worse, not better.  That is because there is a positive basis now building into the spring of '26 contract months for which the basis spread is as much of a risk to backgrounders as is price.  Multiple calculations on every options strategy I could think of cost a great deal of premium for which is as much of a risk as anything.  Here are a few ideas to roll around before Thursday's close.  These are examples of a few hedges that can be done and the risks associated with.  All have varying risks of loss in each, its just to how much risk you wish to assume, how much you wish someone else to assume and how much you are willing to pay them for.  

Sell the futures, unlimited risk, unlimited profit potential. This will subject those looking to market in the spring to the basis spread of index minus the futures contract you are marketing in, and unlimited margin requirements.

Buy the at the money put and sell the out of the money call at $10.00 above the index at the time of entry.  This will produce unlimited risk above the short call strike and unlimited profit potential below the long put strike.  The selling of the call reduces a portion of the basis spread you are already at risk, and offers a predetermined higher sale price to the short call strike.  Like the futures contract, this will have unlimited margin requirements.  This recommendation is the one I recommend from a business stand point of reducing the basis risk, producing a higher predetermined sale price, while maintaining a higher minimum sale floor.

Create a bear put spread and sell a shorter time frame call option.  The bear put spread will produce a window of opportunity.  The premium you pay will be expensive, and consume a portion of that window in premium.  To widen the window further, one could sell a shorter dated January call option at $10.00 out of the money and achieve a couple of things.  One would be to have increased the width of your window, and the other, reduce the time frame of the short call were higher prices realized. 

Note how much premium, and manipulation of strikes and time frames that will have to be done in an attempt to get in front of the curve. Lenders are urged to look at this very carefully as they are the ones most likely to fund the hedges.  If you need help in calculating how these positions will work into the future, and or at expiration, call us and we can show you the calculations needed to figure where you will be, under any of the above strategies. Even with great expectations of having to need more working capital than ever before to produce a pound of beef, all have been surpassed.  This is a tooth and nail fight for market share and cattlemen are in the thick of it.  It's not time to reminisce over previous marketing decisions or begin trying to lighten up.  The unfortunate time frame has to come to decide whether you compete, can compete, or can no longer compete, but do not for a second believe that this time frame is anything but a competition for market share. The higher the price and wider the spreads are for margin or basis, the fewer that can participate.  The optimism, spurred by the cattlemen themselves, is as well producing a very one sided aspect for which only cattle producers have control over and they are fighting over that supply.  All other aspects of consumer demand, and factors that impact the consumers decision on where to spend discretionary income, are out of the hands of producers.  Whether prices move higher or lower, you are in the thick of it now and everybody is assuming risk at time when it costs more to have that risk managed.    

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Corn:

​Corn was sharply lower with all expectations of yield having been woefully short of what USDA came up with.  It is this sharp decline in corn that is believed to have spurred futures traders to buy.  The lower cost of gains is expected to be offset by the spreads between starting feeder and finished fat.  Beans were higher as production levels dropped due to fewer acres, but yield remained elevated.  November '26 beans are believed to have broken a down trendline and are expected to trade higher.  I recommend buying November '26 beans with a sell stop to exit only at $10.37.  This is a sales solicitation.  

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Energy:​

Energy was soft with diesel fuel taking the brunt of the selling.  The loss of strength in diesel fuel suggests a potential slowing of manufacturing and distribution.  A trade of October Heating Oil under $2.19 would suggest to anticipate a test of the contract low.  At the moment, it appears the stagflation is leading more towards recession than another bout of inflation.  

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Bonds:

​Bonds were lower after a quick new high was made upon the release of the CPI report this morning.  As it came in line with expectations, the bonds appeared to look for something to do and seemingly took prices higher before selling off.  Not much has changed in the bond market with more sideways action than up or down.  With both energy and bonds being betwixt and between trends, any signs of recession would lead me to expect bonds higher and energy lower, or of furthering inflation, just the opposite in price direction of the two.  ​

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 “This is intended to be or is in the nature of a solicitation.”  Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.