Live Cattle: The high and low for the day were made in the first 40 minutes and nothing but sideways trading for the remainder of the session. Basis didn't improve much, if any, and everyone appears to be holding their breath to see who pays up, and who doesn't.
Feeder Cattle: The index a little lower, and futures a little higher, narrowed the basis by, a little. Like the fats, the high and low was made early and then sideways trading. At the moment, we are waiting to see what the next cattleman will pay for the next steer that will either tip the market lower or send it higher. Basis remains friendly to those believing prices will move higher. It is currently manageable for those marketing, but you have to be creative to reduce the exposure to the basis. As above, it appears most are holding their breath, or praying, that there is another cattleman out there willing to pay more than what they did.
Basis is unfriendly towards marketing inventory into the future, having paid a historical price in the present. The spread creates a predetermined loss factor if futures are used to hedge. If cash moves to futures, you lose the cash value to the level of short futures position. If futures moves to cash, you have realized losses in the futures position up to the index or cash price.
A long put option will cost the most premium and produce the lowest minimum sale floor. However, it is a limited risk derivative, and were cash prices to continue higher, you would benefit from once the price advanced enough to pay for the premium.
An option spread of buying the at the money put and selling the out of the money call can reduce the premium of the put option by the amount you sell the call option premium for. This allows for unlimited upside and downside price movement, but only of significance above or below one of the two strike prices. This leeway, between the two strikes, allows you to market inventory within that predetermined range, with profits limited to the price of the short call strike price and losses limited to the price of the long put option. Basis is important, wide, and option premiums very high, simply due to the value of the contract.
The above are examples of three hedges you can use to manage the risk you have assumed. You own the most expensive inventory in history with price in the future discounted, but nothing like what it could be discounted to. I recommend you review the above derivatives, familiarize yourself with them, and then consider how you would like to manage the risk you have already assumed.
Corn: I'm still talking out both sides. The narrow price range and coming into planting season leads me to anticipate the current price range to widen. I do not know, or have any good idea as to the direction. However, with the energy complex stout, the President in a stimulation mode, and a few acre swap from corn to beans could create a little pop that farmers could use to average a higher price and make the cattle feeder that owns July calls feel much better than had they not had them.
Bean oil is anticipated to move higher as diesel fuel continues to move higher. Beans are expected to tag along and bean meal used to sell into.
Energy: This is a very specific event that is causing the higher prices in energy. Further escalation may cause a short term issue that has long term impacts. As in, a short term higher price, but forces one to have to book fuel at those levels, as fuel needs for farmers will rise significantly in the coming weeks. Although already $.60 higher, it can move another dollar higher and wouldn't draw much attention to the charts. Energy stayed weak for most of the day, but not by much and as I am finishing this up, diesel is plus on the day, with gasoline and crude oil a tad lower.
Bonds: Bonds were up a tic.
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.
