Shootin' the Bull about slipping margins

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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3/11/2024

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Live Cattle:

Fat futures were mostly lower with the April contract having closed plus on the day.  Last weeks slow slaughter pace is believed by design to limit beef production at the store shelf while allowing for more time to grow in the feedyard. Weights were the same week over week, but still 12 pounds more year over year.  The rationing of cattle continues.  Tuesday's CPI report will help to determine the inflationary factors impacting consumers. If higher, the consumer is still finding ways to spend.  If lower, potentially the impacts from the Fed, and lingering stagflation, are causing the consumer to contract in spending. Regardless, beef and cattle prices remain at the tip top of historical ranges.  The Fed is trying to deflate commodity prices to help consumers afford necessities.  Consider that when contemplating profit margins going forward.  

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Feeder Cattle:

Margins are slipping quickly between everything lighter than 700#'s and the average feeder weight.  With a lot of wheat pastures expected to be grazed out, and grass starting to green, I expect these spreads to continue to narrow.  As well, I would expect the spread to narrow more with the lighter weights increasing in price to the heavier weights.  I say that as there is little to no margin available in cattle feeding, suggesting a tougher row to hoe would be pushing feeder cattle prices higher.  I think due to some determination to remain in the cattle business, the backgrounders will forego risk management and pay anything they have to in order to obtain further inventory. Hence without further advances in feeder cattle prices, will begin to shrink margin.  The next step will be enticing the feedyard to bid high enough to offset input costs and turn a profit.  There is a lot of room for error in both directions.  It appears to me that the losses are trickling down the sectors with them now just starting to impact the backgrounder.  It will be much more difficult to push cattle higher, therefore, more difficult to send profits trickling down. Not to say they won't go higher, but they are already at a historical level with expectations of the futures market even higher.  

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It has been noted by others that I tend to be somewhat pessimistic about cattle prices.  No doubt, I try to manage the inherent risks that comes with livestock production, but at times there are some bright spots.  So, here is some optimism that I can foresee.  The Fed may do nothing for months, keeping the consumer at a more stable rate of spending.  The Biden administration could impact energy prices negatively were they to try to manipulate them prior to the elections.  The Biden administration could implement further handouts to illegal immigrants, giving more money away, regardless to whom, usually trickles into a food item at some point in time and maybe beef will be that item.  Lastly, it could take another six to twelve months for the agenda to solidify enough for the rationing of cattle to become cemented. These factors could keep beef/cattle prices firm, but even the strongest of these doesn't seem enough to increase beef consumption, or willingness to pay a higher price.  Potentially, stagflation could hit the cattle markets.  

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Hogs:

Hog traders left no rock unturned when hunting down bears trying to stay short.  I am still wrong on hogs as they have yet to go down with my analysis now conflicted greatly. 

Corn:

Grains were mixed.  It appears the cancelations were known about the wheat as the day of the rumor, wheat prices fell sharply, but have since gained today after they were confirmed. Corn and beans remain in a bear market with a wave 4 believed in progress. There is some marking of time that will most likely take place to the March 28th planting intentions report. I expect an equal, if not greater number of acres to be planted this year, regardless of which gets the lion's share of.  Beans are slated to get the most.  Some of the fields I saw this weekend that were in corn last year had wheat this year on them, suggesting beans on them this year instead of corn. The wheat crop looks great everywhere I have seen fields. 

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Energy:

Well, another perplexing day in energy.  The gasoline was up sharply with diesel fuel running slightly behind.  The crude oil was barely plus on the day and spent most of the day back and forth of unchanged.  At present, my analysis suggests energy prices to move lower.  I am sticking with this until proven wrong.  At this point, I do not know what that would be.  A trade above $80.00 May crude oil would go a long way is suggesting to anticipate a higher trade, but I believe if diesel fuel begins to trade below $2.54 May would set the stage for a quick drop under $2.20.  

Bonds:

Bonds are marking time.  A soft CPI report Tuesday would be anticipated to see bonds move higher.  I expect inflation to remain stubborn and potentially still entrenched.  However, commodity inflation is anticipated to decline as the pulling of money from the system will continue to impact consumers and businesses alike. I believe bonds are completing a major wave 2 or B correction with the next most probable move a wave C or 3 to exceed current contract high on June bonds.  

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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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