“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

​1/3/2024

Live Cattle:​

In my opinion, the interest in the cattle market, at the top of a known price range, has enabled cattlemen to lay off risk at higher and higher levels.  While some continue to view hindsight, as to what could have been, when what the focus should be is that prices remain higher in order to achieve them when it is your time to market. Of even more interest are the commodity funds that are perceived to be holding significant amounts of long positions in the live and feeder cattle futures markets.  As they have been ever so cautious to not produce premium for cattle feeders to market into, they have shored up basis to a point in which owning the at the money put options appears to be very advantageous when it comes to achieving a minimum sale price.  In the feeder cattle market, they may have slipped up a little when having pushed basis from positive to negative.  Now, the highest price to market inventory is in the future with the cheapest today.  As well, with a fence options spread, upside potential can be made above $270.00 with the sale of the call helping to raise the minimum sale floor produced by the long-put option.  With seemingly a great deal of high-priced cattle on wheat pastures, there is a great need for this price level to hold and advance to return a profit.  

Late Thursday, and all-day Friday, appeared to produce some spread trading. This is a way to help minimize potential adverse price fluctuation of a long position with unrealized gains.  By selling a different contract month, one creates a spread and will then determine which side to bust dependent upon price movement.  One could also buy a put, sell a call, place a stop, or exit the position.  In this particular case, it appears that traders chose to spread up.  The feeder cattle index made a new historical high on Friday's reading on very thin volume.  Next week will be when the volume of physical sales picks up and we have a better idea of the appetite for risk.  As usual, the question today is, "when will this market top".  My answer is the same, when price has rationed the number of producers to the number of animals to take care of.  This can take place in one of two ways.  One is simply to continue to push prices higher until only a few can afford to own cattle or assume the risk of.  The other is to run prices higher and then have them move sharply lower, forcing sales at lower prices.  Neither at the moment appears more likely than the other.  I will say though that if, or when, fundamentals no longer justify a higher price, the futures will move definitively faster and to a greater extent than the physical inventory.  Therefore, while basis in feeder cattle is negative, suggesting the price in the future is higher than present, you have every opportunity afforded to you to make decisions at price levels, currently unavailable in the cash markets, or that may not be in the future, that may or may not benefit your operation.  If you are already in a hedge position, then you hope the price continues higher to assure you of the higher sale you are attempting in the future.  If having to pay margin calls, would you prefer the bottom was dropping out from underneath your production? 

Lenders are on full alert as lines of credit are growing.  Input costs are on the rise and this week continued to push interest rates, fuel, and feed higher.  Oh, and feeder cattle.  The amount of working capital continues to increase, and lenders have ways to help you manage your risks.  One is simply "an assignment of futures contracts".  This is a security agreement between the clearing firm, lender and client.  It allows the lender third party access to your commodity account so they can see where you are hedged or if you are hedged.  Stipulations placed on lines of credit may be that borrowers have to use some form of risk management.  We are very familiar with this security agreement and if it helps producers to secure the working capital needed, or lenders to help clients manage the risks, I recommend you look into it.  Retail interest rates remained higher this week.  Along with new contract highs in the US dollar, the Trump trend of these two markets is well established.  I continue to believe what Trump states when it comes to reducing illegal immigrants.  If can be enforced, the population of the US has the potential to decline by several million for which their existence while in the US was paid for. As I recall back a few weeks ago about whether the beef demand was a reflection of per capita gain, or consumers were willing to pay a higher price.  I believe a portion of the resilient beef demand has been by governments supporting illegal immigrants, suggesting that the beef demand increase has been due to per capita over a willingness to pay a higher price. Again, as I believe the incoming administration will attempt to keep the agenda of deportation, demand could change dramatically in a very short period of time.  Note that just about everything is opposing towards a higher price for cattle, yet cattle continue to climb on what appears to be on the basis of short supply.  Any decline of demand will lessen the impacts of shorter supplies of cattle.  Expansion seems to be on the back burner, most likely keeping supplies to the feed yard steady with last year.  I remain unsure that the US cattle herd will expand anytime soon.    

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.