Shootin' the Bull about subsiding anomalies.

“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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2/2/2024

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Live Cattle:

In my opinion, the optimism futures traders have exhibited since the storm has been immense.  Traders have pushed feeder cattle futures premiums to levels for which the cash markets have never, and may never see.  Living with the consequences of your decision is all there is to marketing.  Having excessive premium to work with, can make those decisions a little more palatable, regardless of outcome. Cattle feeders have little to no premiums to work with, and honestly, need a whole lot more price advance than what has been seen.  Recall that it still won't be until the end of this month before the highest priced feeder steer from last September is slaughtered.  Hence, without a gain in fat cattle prices, it appears the loss this week will equal last weeks of just over $300.00 per head.  Friday began to change the outlook in general for commodities.  I have written several times of opinions I brought back from Chicago.  Those being, a negative first and potentially second quarter of the year.  The snow storm impacted markets severely, but as time goes by, it appears that more damage was done to distribution than production.  Of all the markets, the energy market is believed to be the foretelling tale of what is to come.  After months in an inverted carry charge spread, through a middle east war, and still rockets flying, traders have wiped out the premium to spot month and began building carry.  This is as an important event as anything else there is.  Weakness in energy suggests a weakening economy.  This all comes on the heels of a very odd week in employment factors.  On Wednesday, the ADP report was higher, but missed expectations.  The Fed didn't raise or lower rates, but continued with a more dovish outlook than hawkish.  Thursday's jobless and continuing claims were all higher.  All of these factors suggested a slowing on the employment front.  Low and behold on Friday, the monthly unemployment report was missed by nearly 100%, showing a massive labor increase, when no other reports or actions came close to producing this end result.  I view Friday's unemployment report with skepticism.  Regardless though, it cracked the bond market over the head and dropped the price by more than 2 full points.  I anticipate bond prices to move higher.  

As the weather has now moderated, cattle will regain lost weight, trucks will roll and volumes of sales increase.  The fat cattle futures offer little to nothing in the way of hedging at favorable premiums.  The April fat cattle contract appears very lofty in price due to the number of cattle on feed and moderating weather, anticipated to add lost pounds back on the frame.   This week saw the spread between April and June narrow further with expectations of the April trading under the June contract.  As Craig has shown on the chart of volume of stocker and feeder cattle having plummeted, it is expected to show some leaps and bounds gains as more roads are open and the cattle improving.  This disruption in distribution is currently slated to show a lower slaughter number available in May and early June, while potentially pushing more inventory into July and August.  The feeder cattle market is where the optimism is just spilling over in the spring months and gushing in the summer/fall months.  All of this will be in vain if nothing is done.  Living with the consequence of your actions can be detailed before you ever place the order.  It's just whether you can meet the margin calls and know that convergence of basis will take place of the futures contract settling to the feeder cattle index.  Your regional area may differ in price, but will have the tendency to move higher and lower in a like manner.  I continue to believe that due to the sizable decline from last fall, and sharp rally this winter, the next most probable move is further consolidation of price.  When viewing the May feeder cattle contract, and drawing Gann trend lines from the top and bottom, they form a triangle that comes to a point at around the first of May.  When viewing where those lines intersect, the index is currently just above that intersection. Hence, if the cattle feeder does not come out swinging, the index would remain stable and the premiums of the futures contract erode to the levels of the index.  The weight is on the cattle feeder to perform.  They are going to be asked to dance through hoops of fire as current losses top $300.00 and no pricing scheme can be calculated that reflects a profit.  It's once again, bettin' on the come.  Not only that, last year's high futures prices are now being eclipsed with this year's even loftier premiums.  You have a lot of work to do and fortunately, a great deal of premium to help you make those decisions.

Money will become an issue this year as last, if you do not prepare.  When I say prepared, you may think you are until Shawn calls you every day with tens of thousands of dollars' worth of margin calls to meet.  It can drain your bank account quickly.  I highly recommend you involve your lender.  We work well with lenders as both understand the importance of carrying a marketing plan through fruition that allows for full convergence of basis.  The need for more working capital is going to increase going forward as cost of production is not anticipated to subside anytime soon.  Feed costs may soften further, but doubtful enough to warrant the premiums of feeder cattle futures contracts.  Grains are believed in a bear market with excessive supplies to chew through and seemingly waning demand.  China will be a factor to deal with as we need to export a lot of grains.  Soybeans seem the worst as I have traded beans at under $10.00 more than over $10.00.  The past 10 years has seen beans more so above $10.00, but the lows under $8.00 would be tough to swallow about now.  The wheat crop looks great across the nation with ample moisture.  Again, the information gathered in Chicago led me to anticipate a weak first and maybe second quarter.  The storm produced an anomaly that kept some prices buoyed for some commodities, while others rose.  By the close on Friday, it appears the anomaly is subsiding and prices are beginning to move in the direction thought when having returned from Chicago. 

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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