Shootin' the Bull about cattle on feed

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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6/21/2024

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Live Cattle:

In my opinion, further recognition of the agenda, and the progress being made in beef production, is leading futures traders to be very leery of putting premium on to futures contracts.  This week's strength in June and August fats is believed simply due to some short-bought processors, along with the beef higher, being from some short-bought end meat sellers.   Note that the only strength this week was in the June and August fats as they are the closest to having to converge basis.  Futures traders began last September reeling in the wide basis spreads and have to this point, narrowed the spreads to within a few dollars from at one point, over $30.00.  Just this price action alone should be red flags, bells, and whistles that futures traders no longer foresee the aspects of the cattle feeder bidding physical inventory to the price levels represented by the futures market. Fundamentals are on the verge of shifting with the most recent rally in boxes expected to give way quickly starting next week.  Grocers will be stocking shelves next week with what tends to be the bigger of the summer holidays for beef. Hence, after such, there may not be much to look forward to.  Just after the July 4 celebrations, cattle feeders will be privy to significant inventory through the video sales.  I think that even with a potential to be down 10 to 12% from last year in volume, the cattle feeder may be a little more choosey on what they pay for incoming inventory.  

The dairy/beef cross continues to grow.  I am hearing of long strings of vertical integration for these critters being developed that for some will be the ability to remain in the cattle business.  This action may also have unintended consequences to the milk industry as well.  I am learning more about that, but seemingly the desire to help out the beef sector is somewhat a double-edged sword for some.  Most likely to the producer, it is great, for the reason of lower milk production potentially raises the price for milk, and any percentage gained from the dairy/beef cross is a bonus.  Processors of cheese and dairy products may not be as enthused.  As this part of the agenda grows, it will help to see what further changes may take place. 

Risk to reward ratios in cattle production appears skewed.  Although we could see a surge in consumer spending that increases the demand for cuts, it seems unlikely at the moment with the Fed pulling hard on money to get it out of the system.  I'm not talking about whether the price goes up or down, I'm discussing the amount of profit potential one can expect versus capital expenditure.  While hedging or owning an LRP policy may help to reduce the risk of loss, it won't eliminate it, and that is only if you use some form of risk management. Hence with profit margins narrow, non-existent, or dependent upon further price advance, the amount of capital outlay to the expected return is about as poor as I have seen it in a very long time.  I've seen the cattle on feed report.  The ability to keep 11.6 million head on feed is impressive when so many believed expansion would have already started and feeder cattle prices topping over $300.00.   The industry is believed to have known consumer demand would be destroyed were that to have taken place.  It came darn near it at the current price level and we can clearly see the shift from cuts to the grind.  Were the consumer to have to shift again, I would think it would be to a competing protein. 

The small decline in gasoline prices consumers have been privy to the past couple of weeks has come to a halt as gasoline prices are up over $.22 the past two weeks.  While I do expect energy prices to subside, they are not as of yet.  Bonds continue to be volatile as the Fed continues to apply pressure to slow inflation while the Biden administration fuels it. Having read a comment this week, and then hearing literally the same thing from a couple of others mouths for which we have not conversed, seemingly makes it pretty important.  That being, the divide between rich and poor widening significantly with more from the middle class moving lower than to the upper class.  This is believed a direct result from the differing of the Fed's policies and the Biden administration.  Recall the Fed raised interest rates to help quell inflation while the Biden administration created the inflation reduction act to spend nearly a trillion dollars to reduce inflation.  "Spending to reduce inflation, hmmm, am I missing something here?"  When I view the landscape of inflation, there are a few items that stick out like a sore thumb.  Housing is the first as new home prices made a record this month.  Next is the equities market, at the tip top of the historical price.  Then feeder and fat cattle prices, along with Cocoa and Gold.  Gold sold off sharply today, but continues to trade in a sideways range.  Cocoa has been jockeying back and forth, and I have no idea of what this market will do.  Futures traders in fat and feeder cattle have already taken action to reduce the premiums offered to producers. Not much else is seemingly at new highs.  With multiple markets already having declined from highs, there remains only a few left that have not been impacted by the Fed's policies or improved from Biden's policies.  Hence leading me to expect a dramatic turn of events in the few markets still at their highs.  Grains have resumed their down trend and expected to continue without some new issues.  Regardless of the multiple reasons farmers have been slow to market, or actually been reluctant to, is believed coming to an end.  The increase of on farm storage is believed to have produced a false sense of security.  While no doubt believed an important part of capturing basis spreads if they materialize, but when they don't, farmers tend to hold and hold and hold.  Grains are in a bear market and will need weather damage, not a scare, to produce higher prices.  Demand for everything is expected to decline as the money continues to be sucked from the system by inflation and the Fed's actions.  Throw in a little turmoil that is coming in just 4 months, and there is no way to predict what may soon come in the way of commodity prices. 

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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