Shootin' the Bull about softer cattle & beef prices

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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7/19/2024

Live Cattle:

In my opinion, the beef and cattle markets are softening.  I made the recommendation this week to do whatever it takes to put a floor under your production going forward.  This was a sales solicitation.  The increase of data to go by has begun to make for some definitive movements to be anticipated in my analysis.  Those being, the July 5 high and the July 9 low in the fat cattle contract months. The July 5 high is currently believed as the termination of the triangle that began with the September of '23 crash.  The July 9 low is believed a wave 1 decline with the high made on 7/18 as the wave 2 correction.  A trade under the July 9 low will lead me to believe wave 2 complete and wave 3 in progress.  A trade above the July 5 high, and it will appear as a new leg to the upside beginning.  At present, I would feel uncomfortable being short much above the July 18 high.  Until then, I expect prices to drop and potentially sharply.  There is no longer a shortage of beef year over year and expectations are to be beef positive before years end.  As well, Fridays on feed report continues to show more cattle on feed than last year. While many are flabbergasted at this, you have known for months on end that the agenda has been hitting on all 8 cylinders lately with the next step a turbo booster when more of the beef/dairy cross comes on line.  So, you are not surprised, or taken back by this expected decline in cattle and beef prices.  When basis was at the very least, not egregious to cattle feeders, there seemed to be very little interest in locking anything in.  Now with basis worsening, it will make some even more reluctant to hedge.  Not you though, because you understand that beef production, through more imports of beef and cattle, fewer exports, carcass gains and the beef/dairy cross is growing and that will drive down the price of beef and therefore cattle.  So, while recognizing that a formidable top is believed being made, you are able to manage your risk to keep from further erosion of profit margins.  

Backgrounders continue to remain in a better position as the basis swap for them is believed very beneficial when using futures or options at present.  That being, cash moved higher and futures lower.  Unfortunately, as replacing cattle sold is a costly venture, it is recommended you do whatever it takes to get a floor underneath your recently purchased cattle.  This is a sales solicitation. Especially spring of '25 cattle marketing's.  I could foresee a time frame in which input costs soften due to increased hay and silage production this year.  Were these historically high cattle prices locked in, and the input costs subside, your profit margin would increase.  I do not believe that a lower input cost would offset the potential for a lower value of cattle. What is the flip side?  What if prices move higher instead of lower?  This will depend on how or if you are hedged.  Since you already know what will happen if you don't hedge, consider hedging in a manner that you can live with the consequences of and make sure that includes producing the highest minimum sale floor as possible and assume more risk of not making as much on the top side.  We have attempted to adhere to a very simple statement for which helps me to help you.  That being, we agree to not be too bullish at the top, or too bearish at the bottom.  Currently prices are high for cattle and low for feed.  So, I will urge you this weekend to not be too bullish cattle as we are at all-time historical highs this month, and to not be too bearish feed as new lows from contract high are being made this week. A 10% to 15% break lower in feeder cattle is anticipated.  While a used car salesman approach, but I will go ahead and ask the question, "how many corn farmers wish they would have sold at $8.00 corn and $7.00 corn for the next?"  If you don't know the answer, it is all that did not market $8.00 corn in the year it was made and hedge the next year's production at a dollar discount at $7.00.  Corn today is hugging $4.00, a near 50% drop. Don't think you are immune from such.  While it may not transpire, you are not immune.  

Grains continue to be in a bear market, but bottoms can be made before harvest.  There is not a good way to hedge corn needs due to the carry.  However, with corn not at full carry, it may be the cheapest way to own corn without your own storage.  So, hand to mouth is believed the best way to meet corn needs at the moment. If you feel any need to hedge corn prices, then the futures market is believed the cheapest place to store corn there is.  I would go no further out than the March contract and then roll when or if needed. A trade of corn $.15 to $.25 lower would begin to pique my interest on maybe trying to buy some harvest lows. 

Energy finally began to break lower this week with Friday a big down day.  I expect energy to continue lower.  I recommend for fall harvest fuel needs to go hand to mouth for the time being.  Watching a little of the acceptance speech Thursday night, Trump stated the infamous words, "drill baby drill".  Bonds were soft and I am unsure why, other than a loss of faith in our government as it is tougher to sell US debt to others.  Nonetheless, I expect bonds to continue to move higher and energy prices lower.  As much as the government spending has been believed as the reason why the Fed can't get inflation under control, the loss of the current administration may see some dramatic shifts with both the Presidential office and Federal reserve working in tandem instead of against one another. 

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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