Swift Trading Co.

"Shootin' The Bull" Weekly Analysis...

  For the week ending December 14th


In my opinion, demand was further recognized this week with the higher futures trade.  Most analyst's predicted a sell off due to the Christmas and New Year buying coming to an end.  It didn't though.  I think that is because what we are finally seeing is not necessarily fewer animals from liquidation, but significant disruption of growing cycles this year.  Therefore, potentially more marketing holes to go through in 2019.  April futures set a new contract high this week.  All others remain within striking distance of their respective contract high.  This week’s price action spurred some recommendations and actions.  Although I anticipate further upside potential, this area in the February and April contracts appear profitable for a large portion of cattle to be marketed in these time frames. 

 

At this time, I think it is more important how you market than that you market.  I recommended using a synthetic short futures position over a futures contract, or purchase of a put option. ***This is a sales solicitation.*** I chose this because I want some leeway in marketing.  The buying of an at the money put and selling a slightly out of the money call produces price points in which the realized profits and losses begin, instead of a futures contract where realized profits or losses begin immediately upon entry.  Because this is recommended as a hedge, the cash market plays an intricate part of the outcome.  If there were no cash entity to be calculated, there is little reason to use this strategy.  So, put some pencil to paper this weekend and begin looking to market a portion of your inventory while prices are currently at the known top end of the price range. 

 

Feeder cattle were strong this week.  However, they declined so much the past two months that even this strength only produced a little better than a .382% retracement.  The $146.70 area is littered with resistance and that is just about where March stalled this week.  At this time, I continue to anticipate further upside potential before a correction of this most recent price move materializes.  The higher index reading towards the end of this week has helped the feeder market.  As the pressure from elevated calf sales faded, and April fat futures became a contract month of significance you could get a finished steer into, puts "feeder" cattle back in demand.  I think feed yards were the biggest buyers of the elevated calf crop this fall.  While some of the elevation comes from the expansion phase, a portion is due to financial, labor, feed or other issues.  It seems as if there are just fewer that want to winter cattle over.  I think the reason for this is a need to generate income more so than anything else. 

 

So, it is anticipated that fewer of this falls calf crop will be available to the open market come this spring as feeder cattle.  Basis having narrowed back to near even, from $9.00 positive on November 9th, suggests the future outlook is not a bleak as some thought. Moore Research seasonal tendencies shows feeder cattle bottoming the first of January.  It is possible the futures are bottoming now with the double bottom already in place.  So, in the feeder market, I am not as aggressive in marketing inventory.  I think the inventory will be short this spring for those that do not already have them physically wrapped up.  A synthetic short with wider upside leeway may be a way, but prepare yourself and lender for some significant margin calls if you decide to hedge your inventory.  This is not to say don't hedge, just be careful on how you hedge.  

 

Grains held their own this week.  After the gap up from two Sunday night's ago has held.  Although little price advance has been since the gap up, each commodity is holding their own.  Pork prices remained weak until Friday's trade.  Then by the end of the day, even that didn't hold.  I am perplexed on my hog recommendation due to the length of time in the sideways pattern.  This is not uncommon, but I would like to see some upward price movement soon.  Nothing has changed the wave count structure or fundamentals of China needing US pork.

 


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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