Live Cattle: The day started out with significant activity due mostly to outside market forces. After some of those settled down, so to did cattle. I think this rally is a small C wave rally that may continue to unfold into next week. I don't anticipate it to be much of a rally, but equaling the May highs is anticipated. I don't anticipate there to be much to do were this to transpire. The cattle appear to be in a bear market and although the current market structure is great, it may not be enough to reverse the bear market. Were cattle to resume the down trend, I do not think it will be for a reason with cattle. I would anticipate it being something to do with financial markets impacting consumers than cattle. Read the bond comments below for more information on the consumer.
Feeder Cattle: Through the grape vine, I've heard of dismal sales in sale barns that may impact the index negatively. Traders are trying their best to widen out basis again. Until, it reach's out beyond ($7.00), I won't have much interest in changing the current strategy of using put options or bear put spreads. I wish I knew of a more articulate way to present what I would like to convey, but I don't so here it is. I don't think the money is right yet for a rally in feeders. With few using the futures market at all to hedge inventory, it leads me to believe that the best price to have been achieved this year is $145.98 via the feeder cattle index. Although the futures produced a significantly higher price than this, few took advantage of it. I say that due to the 50,000 pound contract representing approximately 59 animals with a peak of open interest in all contract months at just around 58,000 contracts. So, 59 animals times 58,000 contracts equals 3,422,000 head. That is approximately 1/3 of the number of cattle on feed in 1000 head and over lots. So, for 2/3's of the feeder cattle producers out there, they have had no up movement in price at all this year. On January 2, the index reading was $144.49 and the high for the year at $145.98. They have not experienced any upside price movement. Next, those that use futures and options to hedge. This is where I have no idea who did what. There are some that potentially secured significant premium in futures or options. Looking at volume, the bulk most likely did not start hedging until after the second big day down. Then, there is significant increases in volume that leads me to believe more hedge positions were being placed. The biggest spike in volume though came the day after the contract low. So, there are those that hedged and got out, those that hedged and stayed in and those that hedged after the cows got out of the barn. The likelihood of many having secured the premiums available only in the futures market leads me to believe that the financial health is very weak. Long way around the barn, but I don't believe the backgrounders are going to be able to weather this storm without some type of price protection as it appears the feedyard sector is more than content with the current structure of production. Therefore, I do not anticipate a rally of any significance. Yes, feeders may put another dollar or two on them, but I do not see a reversal in sight. I actually see this congestion area coming to a close within the next two weeks. The big "if" will be what corn does. Corn higher and feeders will move lower. Corn lower and feeders may hold their own.
Lean Hogs: In my mind, I am convincing myself that traders are trying to do everything possible to keep a lid on hog prices. Yes, this is silly coming from someone with 32 years of experience, but I can't help it. There is an issue in China of pork shortages. The US has plenty of pork. When the two come together, it will cause a price increase. Seemingly, at every turn, traders try to stomp on any rallies produced. The close today was a great example of that. Whether weak buyers or aggressive sellers I don't know, but I do not believe that pork prices will falter much more than they already have. The December contract made some headway today. It was not much, and by the close, wasn't hardly anything. However, no further damage was done that may lead me to anticipate further downside movement. I like hogs and have recommended owning hogs on last nights Shootin' the Bull commentary and today's Mid Day Cattle Comment. More likely than not, I'll continue with this buying until December hogs trade above $77.20 or back below $73.10.
Corn: Corn breathed today. It was not a very large breath, so I don't think the rally is near over with. As best I can tell, the initial move down was only 3 waves. The correction of that decline through Tuesday's trade was only 3 waves as well. So, at worse, I think a C wave decline could materialize to around $4.52&1/4 December. It could be a short C wave and have been completed at the intraday low of the day session around $4.60. Due to the initial decline having formed a 3 wave move, it leads me to believe that lower trading in corn is a correction and to anticipate a move back to the upside. A trade above $4.73 December will lead me to believe that minor waves 1 & 2 of major wave 3 are complete and minor wave 3 of major wave 3 is in progress.
Crude: Crude was higher today. Scuttlebutt with Iran is causing some tension. With diesel up $.03 today, it hasn't done much in the way of breaking out of any price congestion. It does though put the price back to the high end of this small congestion band. Were diesel to pop over $1.86 on the August contract, I would call my fuel provider and have them top off tanks for the summer. Not to say it is reversing, but this is not a bad price in comparison to where diesel prices have been in the past 12 months.
US Treasury Bonds: Bonds set a new contract high today! This is the signal to stop what you are doing, contact your lender and get the interest rate lowered on every dollar of debt you have. If the Fed does lower rates, it is already in the market and further price advance of bonds in price from here will not produce an equal lowering of the rate. The banks want some margin. The Fed has kept short term rates low and the market environment has pushed long term rates down as well, squeezing the margins between what the banks borrow it for to what they lend it to you for. It appears that all of this was set off by President Trump attempting to make headway in lowering the US dollar and potentially stimulating our economy. At 3:00 am this morning, Mario Draghi, the ECB chief did a preemptive strike by suggesting the ECB would roll out a new stimulus package. Of course what happens when anyone mentions lowering rates? Stock traders salivate like Pavlov's dog at the sight of cheaper money. Why shouldn't they? The US government has trained traders that when they lower rates, you should go buy stock. So, both the stock market and bond market and US dollar all take off together higher. But this is not the way these markets should interact with one another. Be careful. Something ain't right.
Cheap money and high prices killed the cattle market. It was viewed at the time that the consumer would pay any price for beef and producers poured the coal to production. It was easy with cheap money. Fast forward to today, and it does not appear that expansion, in a time frame of cheap money and reducing packing capacity was the best idea. With a new round of cheap money being through around the corner from the Fed, will the US economy attempt to expand again, to the same fate as cattle two to three years from now. Expansion on cheap money and then all of the sudden the inflation comes in from both sides and narrows profit margins for businesses. Oh, and don't ever forget, a great number of companies don't have margins to begin with. This is all my opinion and not to be confused with fact in anyway shape, form, or fashion.
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
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