Shootin' the Bull about squeezing the cattle feeder

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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3/1/2024

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Live Cattle:

In my opinion, not a great deal has changed.  The cattle feeder is being squeezed at every turn.  Friday's higher price action is believed caused by the fires in north Texas.  With little evidence of liquidation coming to an end, and placements expected to be significant for the month of February, there is no shortage of cattle on feed or beef.  The methodical slaughter pace of the packer has allowed them to regain margin.  Boxes are up over $10.00 in the past two weeks with last week showing carcass weight gains after weeks of brutal weather.  Of the most interest this week came from energy prices having broken out of trading ranges to the upside.  Of more interest is how diesel fuel, the energy source for production, transportation, and manufacturing, is dragging behind crude oil and gasoline price increases.  At one time on Friday, gasoline came to within $.03 of diesel fuel.  Due to gasoline being a direct impact on consumer discretionary spending, I would anticipate this to have an impact on beef, as beef prices have remained sky high, especially in restaurants.  

Cattle prices were volatile this week, to say the least.  Fats traversed about a $5.00 range a couple of times this week, with feeder cattle over $9.00.  The spread between starting feeder and finished fat leaves a great deal of room for error.  Feed costs have moved lower, but feeder cattle prices are up much more than what the cost of gain can overcome. I continue to believe the time frame at hand one of attrition.  That being, the golden rule of, whom ever owns the gold makes the rules. With it anticipated there are some attempting to garner more market share, this will help them achieve such.  A reliance on selling really high fat cattle, to overcome the input costs of everything, is fading fast.  Unlike world markets of cocoa, energy, or grains; meats, especially beef is a domestic market for which only 20% or less is exported.  Not only that, the USDA stated that imports would rise by 5 billion dollars this year with beef 2.5 billion of that.  As well, the US is expected to lose 8 billion dollars of exports.  So, the exporting of high-quality meat and importing of low-grade meat is interesting.  It begins to almost say that the US consumer can't afford the product, and is therefore procuring from cheaper sources.  Cost is a factor.  Note Wendy's attempt to use time frames to increase or decrease price.  That went over like a lead ballon with multiple jokes of traders producing a bid and offer for meals.  What it shows is how desperate publicly traded companies are towards maintaining profit margins for investors. Recall last year's new import line from Paraguay was created.  While the industry seems to not care who instigated this, they are attempting to negate it.  I think this shows the disconnect between producers and retail meat sellers. The producer is agitated that retail meat sellers went behind their back for cheaper product.  This is no different than I think it was the South Carolina firm bringing in cheaper south American beans to crush. Profit margins in all businesses are believed suffering from the initial "transitory" inflation, to its current form of stagflation. This will go to narrow margins further for literally every business.  With no relief in sight either, due to the Fed attempting to quell inflation and the current administration fueling it, the volatility and expanse of price is anticipated to be immense.  It already is in some markets.  

Divergence of basis and widening spreads between starting feeder and finished fat continues to squeeze cattle feeders.  The benefit of the high premiums on futures to backgrounders, is detriment to the cattle feeder.  The cattle feeder can't do much about it as buying feeder cattle futures or options on, at such a premium, exposes them to risks that may not be able to be managed. Therefore, hand to mouth is about as far out as any cattle feeder should be going.  Not so to the backgrounder.  They have been swimming in premium for which has to remain in order to achieve convergence of basis at the highest price.  Although with the premiums, the minimum price remains mostly above current cash.  So, look at the sectors.  Cow/calf thru backgrounders are enjoying record prices for product.  The packer, most grocers, and a few restaurants are enjoying profit margins, albeit thin.  It is the cattle feeder for which losses simply continue to mount.  Maybe they can stem the flow of how large, but seemingly they remain projected through this year.  Not only that, the sheer amount of working capital now needed to produce a pound of beef and stay in business just keeps increasing. Lastly, don't forget that the Federal Reserve is tasked with quelling inflation and cattle prices are inflated. It's a good time to practice risk management.  

Energy prices broke out and traded higher in crude, gasoline and diesel fuel.  I do not understand a great deal of the higher trading due to such strong evidence of elevated US production.  Nonetheless, it is higher and will more than likely influence other markets due to the shift it may cause in consumer discretionary spending. Gold and silver were higher as well with it appearing as if these markets are reflecting a shift back into a strong inflationary time frame.  If so, then the potential to produce a significant recession appears looming.  Bonds ended the week higher, but it wasn't until meek economic data showed a softening economy on Friday morning that pushed them higher.  If bonds do start to move lower, I would not expect them to for long, due to the higher energy prices, and general inflation to cause the consumer to contract in spending, sending the economy into a recession.  With still another 8 months to go of this administration, and a belief the illegal immigration will escalate the closer to elections we get, the more debt governments will accrue.  With the definition of austerity not even known by politicians, bankruptcy or civil war will be the end result.  However, through the interim, expect more printing of money, hyperinflation for some commodities, and massive economic recession. I do believe history repeats itself and there is ample to reflect on as to foresee what is to come.  

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