Shootin' the Bull about commodity deflation

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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3/8/2024

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Live Cattle:

In my opinion, I believe that the bout of inflation the US economy has been traversing for the past 3 months is coming to an end.  Not to beat a dead horse, but information gathered from Chicago in January is believed still very pertinent.  Price action this week in the Crude Oil market is believed to have struck resistance at the $80.00 level.  May Crude traded up to just under the $80.00 price starting last Friday with all of this week's trading having fallen just short of the $80.00 level.  On Friday, crude oil began to trade lower along with all the products.  I expect May crude to trade under $77.00, adding considerable credibility to the analysis. If materializes, a quick move to $74.00 is anticipated.  Below that would break out of a triangle and suggest to anticipate a downside target to $62.75.  The bond market is believed to have reversed and trading higher.  The unemployment report, which showed a 77K increase over the guesstimate, saw traders push bonds down almost a point, before rallying and setting a new high for the day.  The price action of these two markets leads me to anticipate the current bout of inflation to subside into commodity deflation, or potentially worse, economic recession. 

As you know, there are fewer beef cattle today than since 1955.  The chart of the beef cattle herd has moved from upper left to lower right since 1975.  The chart of beef production in the same time frame has steadily moved from the lower left to the upper right.  At present, rationing is taking place to keep the numbers of beef cattle from shrinking to a point in which it is too small to rebuild from, or disrupts beef production.  The rationing is taking place in multiple forms.  Some of which are; imports of cheaper beef and cattle have increased, with exports of expensive US beef decreased.  Nutritionist are working hard every day increasing the carcass performance of the cattle currently available.  Average carcass weights have continually grown with seemingly very few issues noted so far.  Another has been the slaughter pace.  This pace has been slowed that keeps cattle on feed longer, producing those additional pounds, as well as, keeps the price of beef elevated to grocers and restaurants through the lower production numbers. Hence curbing consumer demand.  Lastly, and to me the most interesting, has been the dairy/beef cross.  This is a hornet's nest of discussion.  Some can't stand it because it's not beef cattle.  Some can't believe that it will make any difference at all, while others, like me, believe it to be another factor in rationing cattle that will help to mitigate a percentage of the loss of heifer slaughter, if or when the industry begins to expand.  With few signs of expansion, it appears that rationing as a whole is keeping cattle prices from soaring much higher than they already have.  Which is another thing to remember, cattle prices are already sky high and very unprofitable in multiple sectors of the industry.   

The spread between starting feeder and finished fat continues to be exceptionally wide.  Leading one to expect either a dramatic rise in fed cattle prices, or decline in feed costs.  At present, neither appears likely.  Hence the losses.  Going forward, I don't expect this to change by much without one of two factors taking place.  One would be some form of consortium for which influence could then be used to help drive prices of feeder cattle lower.  The other would be a significant rise in control of a larger percentage of inventory.  Therefore, having put some out of business opens the door of opportunity to others.  Since there has been a noticeable shift in certain end meat sellers to source calves, stockers and feeders, and market as steaks and hamburgers on retail market shelves, it suggests those still having to just buy fat cattle and market them in restaurants or grocers potentially have lower profit margins.  The confidentiality of all the marketing alternatives makes piecing together the information difficult.  So, I hope to be fitting the pieces together correctly and continue to ask for help when you see one out of place.  I have greatly appreciated the comments this week on the dairy/beef cross.  All have been beneficial to my analysis.  Going forward, I think the spreads between starting feeder and finished fat will remain wide.  This does not suggest a price direction, just a width that appears to be unprofitable in most sectors. I continue to expect a triangular price formation in the feeder cattle futures with current highs believed finding stiff resistance at the top end of the triangle drawn with the help of computer-generated Gann fan lines.  

Corn, beans, and wheat remain in bear markets with corn and beans attempting to produce what appears to be a wave 4 correction.  Of what magnitude is still unknown.  The next most probable move is believed sideways to higher, leading into the March 28 planted acres report.  My expectation is there may be some swapping of acres between corn and beans, with potentially a little cotton thrown into the mix.  However, I expect overall the same number of acres in production this year, as last, if not a few more.  Cattlemen sell cattle by the pound and when times get tough, they put more pounds on cattle.  Row crop farmers sell grain by the bushel, and when times get tough, they grow more bushels. There are a couple trades that can be initiated for grain farmers in both the new crop and old, if you can live with your marketing decisions.  That is what marketing is all about, being able to live with your decisions.  If you need some help, we can help. 

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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