Shootin' the Bull about a lot to chew through

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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8/30/2024

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At a turning point of cattle cycle

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In my opinion, some reprieve in the selling this week has been welcomed. Futures traders remain overly cautious to push basis to a level for which producers may pounce on. Increased beef production, while cattle production decreases, has been the feat of the year.  With number of cattle on feed, expected to be placed in the fall, and seasonal tendency for cattle weights to improve, I expect beef production to remain elevated into the first quarter.  So, for the time being, the market action is unfolding in a manner that is not surprising with expectations of further narrowing of basis.  With the dramatic fundamental shift in basis, the marketing strategy has changed to one in which the current positive basis narrows enough to reduce risk of marketing in the specific contract month needed.  Futures traders aren't helping much when they began spreading the market, causing the back end to decline to much lower levels than the front.  Multiple conversations this week has led me to repeat the line that I took to heart.  That being, "we are in uncharted waters".  Apparently, with every good idea put into motion, it can have a tendency to have negative consequences to it.  In this case, it has been learned the dairy industry is approximately 1 million head short of dairy replacement heifers with a breeding scheme set at 40% dairy production and 60% beef/dairy cross production.  We have seen milk prices soar, with this issue being a part of that rally.  Hence although probably not done intentionally to raise milk prices, but has done so, nonetheless.  At the moment, dairies appear to be in the catbird seat with two revenue streams instead of one.  The harder they pull to keep these two streams flowing, the greater the consequences of higher milk prices.  With as much capital investment believed going into this, it is not going away anytime soon.  

When I review my webinar from two weeks ago, the spring of '25 rally that is anticipated seems to have a tad more credibility than it did, due to the potential for expansion in the beef herd, and inability to increase beef/dairy cross that would offset beef heifer retention.  It is currently enough, with the other portions of the agenda in keeping beef production stable with last year.  Any new pull-on beef cattle from expansion are not believed able to be offset anytime soon.  Hence a reason for a spring rally.  Until then, the consumer has to go through managing a new school year, with inflation continuing to hamper consumers.  With the stark difference in basis now, as above, we are searching for a basis width narrow enough to market into that won't be too wide for backgrounders to market into.  I recommend you lay out plans, in writing, for the width of basis you can conduct business in and make every hedge specific to marketing your inventory.  I do not feel as if there is much room for error due to the dramatic fundamental change in basis. Attempt to market cattle as close to the expiration of a futures contract in order to achieve as narrow of a basis as possible.  If you have not liked the results of your previous marketing agenda, consider changing to something where you have more control over what price you market inventory.  A major lateral move is taking place.  The production side of the industry is consolidating rapidly.  Multiple stories from Canada to south Texas all sound the same.  Once there were multiple producers with multiple cattle.  Today, there are fewer producers with multiple cattle.  This is a trend that is not expected to subside anytime soon.  The consumer appears to have shifted all they can from cuts to the grind.  Any further shifting in discretionary spending will lead me to believe they will revert to an alternative protein.  

Energy continued to be more than volatile this week, but at weeks end, it had plummeted.  I expect it to continue to move lower, if not sharply lower, due to further evidence of the consumer not in as good of a position as government data reports reflect.  An earnings report from Dollar General this week exposed the weakness of those earning less than $35,000.00.  Their stock fell 30% as fears of the poor having to use credit cards to buy basic necessities and when surveyed, they would most likely miss a monthly payment.  As this is expected to trickle up, elevated beef consumption will continue to face an uphill battle.  A new political administration will be at the helm starting next year and that will mean either more money printed and thrown to the wind, or potentially a varied number of actions that may not be of much help either.  Bonds were soft all week as the government data, by a tenth of a percent, continues to show growth over slowing.  All the while stories like those of Dollar General, and simply looking and listening around, suggest consumers are having to shift consistently to make ends meet.  Next week will start the end of the third quarter with a slew of reports out that will be wrapped up with Friday's Unemployment report.  That is the one I will pay close attention to, simply due to Powell's comments of fear of weakening job data. Due to the belief that the comment heard this week to be so important, I will repeat it and hope you take this to heart, "we are in uncharted waters". 

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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