“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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2/9/2024

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Live Cattle:

In my opinion futures traders have provided the industry with well needed premium to market into.  While the fat cattle futures are thin on premium, the feeder cattle futures are overflowing.  Beef production is anticipated to increase going forward as the impacts from the snow storm continue to subside.  Although placements will be skewed greatly, sharply lower in January and higher in February, the configuration suggests that cattle futures may settle into a trading range as the average between these two months won't be known until near the end of March.  This suggests that there will be ample cattle out to April, as all of those were placed prior to the storm, but make the June time frame thin of fat cattle inventory.  Past that, numbers will be anticipated to pick up and most likely, not be curtailed to the extent some think.  The expectation remains that cow/calf operations will expand this year and pull a percent of the heifer supply from slaughter.  The problem with this is that I can't seem to find too many producers ready or willing to expand.  Labor being a significant reason and age of the producer the next.  Money is an issue to some, but those large ranches seemingly have the money, and will most likely be the ones to expand, if able.  I believe that southeast cattle production will wane the quickest.  The number of farms that would have 10 to 50 momma cows are being lost quickly to development.  With the carbon credit issues now going to be a huge factor, it will simply take more money to produce a pound of beef.  Therefore, the industry appears ripe for further vertical integration.  Those who are young, well capitalized, and know how to manage risk of adverse price fluctuation, are anticipated to grow, while the others continue to contract.  I continue to anticipate a more lateral move this year than expansion or further liquidation.  The chart that Dr. Peel showed this week on the herd decline is awesome and should be a stark reminder that although cattle production continues to be in a massive bear market, beef production remains in a massive bull market.  Carcass weights will continue to grow, the dairy/beef cross will increase, and already it is noted how much Australian and New Zealand beef the US is importing.  Recall, there are no quotas for this beef.  South American beef does have quota's, but could be raised if another company prods the USDA to do such, like they did for Paraguay.  The agenda to keep the US consumer supplied with beef continues at a pace believed adequate to keep retail beef prices high to the consumer, quelling demand, and potentially allow time for the beef herd to be rebuilt.  Recall that dairy keeps running at 100% of everything.  Milk prices remain low, in near full carry, with butter and cheese prices having softened significantly.  There is a lot of inventory there to work from.  

I anticipate the divergence of basis to give way to convergence.  Whether that is cash moving higher or futures lower, no one knows.  Regardless of which, the basis is wide, with premium being offered in some months for which a cash price has never been traded.  As well, the spreads between starting feeder and finished fat continues to widen.  That spread will need to narrow in order to achieve any hopes of margin to fed cattle.  I recommend backgrounders use the wide basis to help manage the risk of potential adverse price fluctuation.  This is a sales solicitation.  As well, simply capturing the basis may produce a higher profit margin if cash stays the same or goes lower.  Hence, the cash market has to go to the levels of futures, and be there at expiration when you sell your cattle.  Optimism is great to market into as reality can be completely different. 

Grains and oilseeds continued their bear markets this week.  I anticipate a flush that will cause excessive farmer selling and may produce a short-term bottom.  Unfortunately, the decline may be such that the rally merely brings prices back to where they are today.  I anticipate corn to lose another $.20 to $.50 and beans a dollar plus.  The wheat crop looks great everywhere, and there is a lot of it.  Energy was volatile and higher at weeks end.  The rise in energy prices and last week's starkly different than anticipated unemployment report has set the tone of another bout of inflation.  I think this will be short lived, but could grow.  Bonds continued lower all week.  The size of the miss on the unemployment guess is believed to have pushed some large traders out of the way, and taken some time to do such.  Nonetheless, interest rates were higher, equities higher, and the US dollar higher.  While equities may be a shining light, higher interest rates and higher dollar are believed to stifle domestic productivity and exports.  

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.