Live Cattle: I don't anticipate retailers and restaurants to be overly aggressive in restocking shelves or menu items after last weeks holiday. I do expect packers to become even more creative in manners for which to find and hold margin. If fats are moving lower, I think it will simply be less consumer demand. With cattle feeders having to feed the most expensive inventory placed to date out to February, cattle feeders are anticipated to get equally as creative in an attempt to hold on to their margins as well. My opinion alone is that the price action from the first of July to present will be reversed by December to the same level it started from. Barring the April low, this time frame produced an oscillator reading of below the zero line. Hence a new wave, and believed the 5th wave. Therefore, upon completion of the 5th wave, the next most probable move is a correction back to the wave 4 low of the same magnitude. I don't expect it to be straight down, but could have some extensive price movement in short periods of time. Since there is not expected to be any more cattle made available, were the price to decline, it would be believed that either the consumer, packer, or cattle feeder has been rationed to the point of a loss in demand.
Feeder Cattle: A reversal will be horrible for the cattle feeder, but backgrounders continue to be in a unique position of having cattle feeders bid feeders over $30.00 higher than fats since July. Therefore, with only $11.00 lower from the contract high and $59.00 higher than July 1, and only $5.00 lower from the index high and $49.00 higher than July 1, it's not even close to being too late to do anything. If, and that may be a big if, but if it were found that cattle feeders have begun to reduce production capacity, or worse, shut some down, the demand for feeder cattle could dry up significantly enough to produce the same price action as is anticipated in the fats. That being, a return to the wave 4 low of the same magnitude that was believed made the first of July. Daily price ranges are anticipated to remain wide with a great deal more volatility anticipated than recently seen.
I know how costly attempting to manage potential adverse risk has been. It is not going to get much better as you will still have to procure and market inventory. Therefore, if going to still participate, then you will continue to assume risk and have to decide who and how much of you wish to assume versus someone else. Option premiums are not inflated from a volatility standpoint, they are inflated due to the value of the contract having been inflated. With so much price expanse having taken place over the past 12 months, with significant gains made in the past 2 months, some will find their previous minimum sale floors at levels that may be difficult to reach, even on a retracement back to the July low. Therefore, consider rolling up put option strike prices and if having used an LRP policy, you can buy an option on a futures contract to help mitigate the spread between your LRP floor and current market price. Of one thing for sure, you are going to have to have more working capital to participate in the cattle industry, whether hedged or not.
The flip side of all of this is simply that cattle feeders continue to attempt to out bid one another for incoming inventory.
Corn: Corn is stubborn. One of the biggest crops in history, coupled with carryover from last year, and the price not only remains above $4.00, but is somewhat advancing. Recall there is no trade deal with China and that is on the forefront of every farmers mind as new and increased demand from elsewhere will have to be discovered to offset. While this issue may not impact cattle feeders, whos revenue stream is not as dependent upon cost of gain, it will be of greater disadvantage for those still feeding in a more traditional manner. While most will scoff at this, but an at the money, $4.50 July corn call will cost approximately $.02&3/4 a bushel per month to carry corn into July at $4.50 at today's close of $.31&1/4. Again, I don't think there is much concern of the size or quality of the crop, but the price is with the spread width of feeder to fat relationship.
Energy: Energy was lower today. I anticipate energy to soften.
Bonds: Bonds were higher today. Friday will be a significant day if the anticipated revisions are made to the unemployment report. Some are suggesting it will be reduced significantly, suggesting a great deal of previous job formations never took place. A trade above 115'20 December will suggest a break out from the triangle to the upside. A lowering of rates is a need for stimulation. When coupling the extensive surge of inflation, due to Biden's printing press, and still moving higher, due to Trump's desire to keep the economy from going into a recession, consumers are battling multiple fronts with expectations that not near as many are employed as previously thought. This may lead to the idea that some are able to spend at a greater rate than a majority of others.
Christopher B. Swift is a commodity broker and consultant with Swift Trading Company in Nashville, TN. Mr. Swift authors the daily commentaries "Mid Day Cattle Comment" and "Shootin' the Bull" commentary found on his website @ www.shootinthebull.com
This is intended to be or is in the nature of a solicitation.” Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.
