Neutral on-feed turns cattle traders to weather premium; grains turn higher

Howdy market watchers! 

January is well underway, and we have survived the first polar vortex.  New record low temperatures have been made for this time of year with another round of cold and precipitation returning next week.  Make sure your facets are running slowly and not just dripping.  This is a different kind of cold that doesn’t discriminate.  

While cattle markets seemed somewhat slow to react as much as I was expecting last week, we managed to add premium this week after futures contracts decidedly trade above the 50-day moving averages.  That strength was abundantly evident on Thursday with the front-month January feeder cattle contract surging $2.90 per cwt after already rallying nearly $2.50 per cwt for the first half of the week.  

With such market conviction seen from increasing open interest, I was expecting a new daily high on Friday, but finished with an inside day, lower high and higher low, on the charts.  Technically, this typically indicates that the next session’s move on Monday will see follow-through in that same direction on Tuesday.  

It often seems that market moves on the morning of cattle-on-feed report days foreshadow the report’s bias.  Released at 2:00 PM CDT after the market close at 1:05 PM CDT, USDA’s cattle-on-feed report was largely neutral.  January 1st on-feed came in at 102.1 percent, in line with trade expectations, while December placements at 95.5 percent of last year were one-tenth higher than expectations of 95.4 percent although the lowest in 8 years. December marketings came in at 99.1 percent of last year, which was slightly lower than average trade guesses of 99.3 percent, but also the lowest in 8 years.  Total cattle and calves on feed in feedlots with capacity of 1,000 head or more comes to 11.93 million head, 60 percent of which are steers and steer calves with the balance being heifers and heifer calves.  
 

Given that all categories were in line with expectations, I do not expect much reaction in Monday’s session and so the market will take ques from fed cattle cash trade that was light this week, slaughter numbers as well as weather.  I could see weather premium being supportive although it looks like it’s mainly cold weather and rain outside of Iowa and parts of Kansas that will see frozen precipitation and could impact performance.  

Cattle traders will now look ahead to the bi-annual USDA inventory report at the end of the month. January feeder options and futures expire on the 25th.  March feeder chart gaps are open above around $245.00 and then around $257.45 on April feeders.  I believe we will see these gaps filled, but probably not before the January contract expiration.  Friday also finished with an inside chart day on fed cattle contracts with gaps $10.000 per cwt higher.  

The supply side over the longer term is bullish no matter how you slice it. However, demand remains the key wildcard.  US export demand that soared to new records in the past couple years slowed notably in 2023.  Beef buying from China, Japan and South Korea, which accounts for 60 percent of all US beef exports, was down 13 percent last year through November.  The USDA is expecting exports in 2024 to be down another 6 percent while full year 2023 exports are forecast to be lower by nearly 15 percent.  Slowing Asian economies and greater competition in the backdrop of a higher US dollar have challenged US export growth.  

The US dollar rebounded this week gapping higher on the chart on Tuesday. Thursday and Friday action slowed with lower lows and I expect weakness next week with that gap being filled.  We are now in the two-week blackout period ahead of the next FOMC kicking off on January 30th and so we will not hear anything further from Fed Governors until the rate decision on the last day of the month.  After peak optimism of a handful of rates cuts in 2024, the rhetoric has changed significantly in the past couple weeks.  Stubborn inflation and a strong labor market have clouded the outlook.  While expectations of rate hikes seems to be off the table, the certainty of rate cuts is far from decided.  

The higher US dollar has created a headwind for US grain exports although we finally saw the Chinese back buying US soybeans late this week.  That was needed news after a lack of buying and rains in South America plummeted soybean futures since last Friday’s USDA reports. Soybean futures made new recent lows on Thursday, but managed to close positive on the day and making new daily highs on Friday although closing well off session highs.  

Private estimates in Brazil continue slashing soybean production numbers although the markets have so far ignored them.  With Brazil soybean harvest now in progress, we will soon know how right or wrong these estimates are.  Early soybean harvest has been ahead of average, which often indicates poor yields that have been extremely variable.  Brazil’s 1st corn crop harvest has been in line with average years while the 2nd corn crop, called “safrinha”, planting is off to a fast start given the speed of bean harvest.  

There are large chart gaps 86-cents higher on March soybeans and 54-cents higher on the November new crop soybean crop.  I believe these gaps will “soon” be filled with the recent selloff way overdone. 

Buying seemed to return to all grain markets after new recent lows on Thursday.  Even high risk-asset Bitcoin rebounded Friday after the 8,000+ profit taking after the ETF was announced.  I only mention this as Bitcoin is a decent barometer for risk-on sentiments. 

Speaking of, the Dow Jones and S&P 500 indices both made new all-time, record highs on Friday.  Just as the highs in late December and mid-January looked to be double tops, Friday’s action exploded through those levels.  This is also evidence of the risk-on trade returning to the trade that is likely to present into next week.  

If you are interested in the latest insights into crop insurance, risk management and marketing including specialty crops as well as technology apps to help you manage your farm and ranch operation, be sure to join us for our annual gathering on Thursday, January 25th at 5:30 PM at Enid Brewing Company.  RSVP appreciated, which you can do by email or calling our office.  

Sidwell Strategies is the one-stop shop to protect cattle with futures, puts, LRP or a combination of all, which is probably the best strategy overall.  

If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss risk management and marketing solutions to pursue your objectives.  Self-trading accounts are also available.  It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.  

Wishing everyone a successful trading week!  Let us know if you'd like to join our daily market price and commentary text messages to stay informed!

Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies.  He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com.  Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer. 

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