Shootin' the Bull about a lull in the cash markets

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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9/13/2024

Live Cattle:​

In my opinion, futures traders this week were able to narrow basis for which last week's Anthrax outbreak caused a severe widening of.  Quick action helped to avoid further spreading of what could have been a black swan of a naturally occurring event.  While still keeping a safe distance from cash, futures traders were able to push most contract months up to last Wednesday's high from which they fell from. As expected, this week's trading did very little in providing a direction, and more so just narrowed basis.  I expect a great deal more of this as seemingly cash markets are in a lull.  That lull is believed caused by indecision on behalf of most all participants.  There is great indecision on what prices will be for the remainder of this year.  Indecision on whether the consumer continues to contract in spending, or are able to find more discretionary funds at the end of the month.  While in this lull, you need to be making some decisions on closing out cattle for the remainder of this year and prepare for fewer cattle to work with next year.  The large decline of dairy heifer replacements, and the heavy pull of live imports from Mexico and Canada, should begin to reflect more closely on feed numbers, of the liquidation of beef cattle that has taken place over the past 3 years.  We have pulled exceptionally hard this year on Mexico and Canada to keep on feed levels well above any expectations.  I think this expectation, along with a very vulnerable consumer, will create a tremendous amount of volatility.   

So, what does one do?  Manage the risk you can.  Take concerted action to turn variable input costs into fixed input costs.  Use options on futures contracts to produce leeway in marketing that may or may not have benefits.  A great deal of this is you having to make difficult decisions in what appears as a faster paced movement of price, as well as the changing fundamentals both cattlemen and consumers are having to shift through to make ends meet.  Note references in attempting to market or procure as close to the expiration of a futures contract as possible in an attempt to achieve as full of basis convergence as possible.  If you don't understand basis, then that is what you need to spend the weekend learning.  Although backgrounders are now having to deal with discounts, those detrimental discounts to backgrounders are beneficial to cattle feeders.  Again, basis swings, and does not shine on the same dog all the time are factors you need to get used to.  That is true with feed costs and grain prices.  At present, corn is cheap and cattle are high.  The WASDE report showed us how big the crop is and how much work is in front of farmers to market that inventory.  I think a great deal of the size of the crop has already been traded or recognized, regardless of whether cash or forward contract sales were made or not.  I expect full attention to be diverted to South America and their drought issues on hand during planting.  This has the potential to push beans and corn higher, even with the large US crop. Livestock producers are believed nowhere near out of the woods yet in attempting to manage the lower price of feed.  Poultry and pork producers are believed to have a very advantageous price in soymeal with little carry in the market, and if previous recommendations were followed, carry was inverted at that time, and you have benefited from that as well.  Corn, is cheapest today with carry, although not full, all the way to July.  I recommend you use every nook and cranny to fill with corn to take advantage of today's lower price and hopefully escape carry charges or potential rise in price.   

Although inflation continues to ring loudly, the attempts to quell have been pretty moot.  Yes, it has declined to now running at 2.5%, but that is still 2.5% higher than previous.  Until you get a negative number, inflation continues.  With the Fed believed going to stimulate things a little, it produces a two-sided coin.  One side suggests a rate hike simply signals further deflation as the economy is needing to be stimulated. The other side of the coin is that lower rates are intended to stimulate, therefore potentially causing another bout of inflation.  This is a tough row to hoe and I am more than perplexed in attempting to manage the risk associated with fewer cattle to work with and a consumer believed to be feeling the impacts of inflation. Energy started off the week sharply lower, ended higher on the week, but closed down on the day Friday.  I believe this to have been a correction in the down trend with expectations of a new contract low in energy.  Bonds were firmer as the Fed is expected to lower rates next week.  I don't think it will do very much as the issue appears to be excessive government spending for which a lower interest rate won't help the consumer buy groceries for any less. For the time being, I continue to expect further deflation, even with the Fed lowering rates.  I expect this due to lower rates not having any direct impact to a consumer's bottom line of ability to buy necessities.  If thinking it will filter down, I think you will be waiting a long time for such.  I continue to favor the observation of "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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