“Shootin’ The Bull”
End of Day Market Recap
by Christopher Swift
2/1/2024
Live Cattle:
More misery for the cattle feeder today. If a better cash trade is seen this week, it may be just enough to keep the losses this week from growing. This month should wrap up the worst of the highest prices ever paid last September for incoming inventory. Low and behold, it is starting all over again. Margins are nowhere to be found, and today the March feeder/August fat spread widened to $63.75. That is a tremendous spread to overcome. Once again, the cattle feeder is going to be solely reliant upon fat cattle prices moving higher, and the willingness of the consumer to pay the higher beef prices in order to return input costs. With evidence now building of a slowing economy, it will be a task to push beef to the consumer at higher prices. The Fed kept rates the same, with further aspects of a cut sometime this year. Wednesday's ADP report was higher, but less than expectations. Today's jobless claims and continuing claims were sharply higher, sending bonds to within just over a point from contract high. Friday's unemployment report is anticipated to be higher, but like the ADP report, miss the expectation. Current price action is believed futures traders. They are supplying producers with miniscule premiums to hedge with. Therefore, the risk to the cattle feeder appears immense.
Feeder Cattle:
It is the feeder cattle futures that have premiums, allowing backgrounders to manage risk of adverse price fluctuation with a nice cushion of premium. Market action, as today, is the reason for the consistent reminders to have ample working capital. As well, using the options spreads over the futures allows for potential benefit over the futures price. The index is creeping higher in relation to the futures. The negative basis is diverging. We know they will converge as expiration nears, and the settlement of the futures contract to the index. In the interim of production, the width can produce enormous unrealized losses, hence the reason for adequate working capital. The consequences of your decisions can be detailed before ever placing the first order. It is simply whether or not you can live with those consequences of your decisions.
With today's new high, I recommend wrapping up any lose ends. I recommend buying the at the money put and selling the $10.00 out of the money call in the contract month you will market inventory at the end of that month. This is a sales solicitation. At today's futures price, all contract months but the March, produce a fence options strategy for which the short call strike price is above the all time high of the index. So, the question at hand is, with the futures traders already offering the premiums, will the cattle feeder be as obliged? That is the question, not how high the futures traders will push futures, but how willing the cattle feeder will be to bid incoming inventory higher, against themselves. I have little doubt that they can pay the price, but have reservations as to if they will profit from.
Hogs:
June hogs are up $9.00 from when I recommended hog producers and packers to buy the at the money $88.00 put and sell the $98.00 call. At today's high, after a $9.00 run higher, there is still no realized losses in this position. Unrealized yes, but only when or if the underlying futures settle in June above the short call strike price do realized losses begin. With this rally, I can't help but recommend once again to hog producers or packers to buy the at the June $96.00 put and sell the $106.00 call. This is a sales solicitation. The index has risen approximately $7.33 in the same time frame. Once again, diverging basis with a known factor they will converge to the lean hog index at expiration.
Corn:
I anticipate corn and beans to trade lower. The previously recommended December '24 corn options spread of buying the $4.70 put, selling the $4.00 put, and selling the $5.50 call for $.09 remains valid. Beans are softening and I continue to anticipate a break under $11.00 March. November beans, being touted as the benefactor of more acres this year, dropped to within a nickel of previous low close.
Energy:
The rug was jerked from beneath the bulls feet in energy today. After an exceptionally volatile start, at 11:37 am, crude dropped $2.54 in 14 minutes. Not a record by a long shot, but a rude awakening for the long that stepped away for a smoke break. Diesel and gasoline fell as well. It appears that with the jobs data reflecting a weakening tone, commodities are prone to trade lower.
Bonds:
This week showed us that employment is slowing. Those being laid off are middle to upper management positions with more and more hourly workers needed. The ADP report came in under expectation. The Fed did not raise rates, and leaned just a little more dovish. Today's jobless and continuing claims were higher. Friday's unemployment report is anticipated to reflect growth, but less than expected. Bonds are nearing contract high. A new contract high will suggest wave 4 complete and wave 5 in progress. With the impact of the storm subsiding, it appears markets are moving in directions believed correct from analysis gathered at the ADMIS conference.
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.
On the date of publication, Chris Swift did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Disclosure Policy here.
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