"Shootin' The Bull" Weekly Analysis...
For the week ending July 10, 2020
In my opinion, not much transpired this week in the cattle market. Futures traders were helpful in widening the negative basis a little more for producers to lock in profits with futures that have not been available for over 4 years. Fats have traded a positive basis since near the first of 2016. Some view the current swap in basis to be an indicator of a change in the trend. I don't disregard this, but the trade kept feeder basis negative for the same time frame and more times than not, the negative basis in feeders was converged by futures moving lower, not cash higher. That is not to say there won't be a rally in cash, just that history won't confirm the change in basis to be a change in trend. I continue to believe that the cattle market, standing on its own, is at a point in which not much would happen were fundamentals to only be cattle. There is ample packing capacity and supply at this time, and into the foreseeable future. It is the consumer that continues to perplex analysis.
The admitted manipulation by the Fed has diluted many factors, both technical and fundamental. In the past, factors have portrayed fundamentals or technical movements that suggest a price direction. Today though, with the Fed's interference, it skew's thinking and money flow to a point in which markets don't necessarily move in the direction pointed by technical or fundamental analysis. Of course I understand I could just be wrong. I take that fully into consideration as well and therefore plan ahead in my actions to allow for error in judgement. This week, I recommended to market fat cattle with an ‘at the money’ put option and a $4.00 to $6.00 out of the money call option to create a synthetic short futures position. ***This was a sales solicitation.*** With the basis so negative, the synthetic may be what increases the sale price by the call strike price being $4.00 to $6.00 over the current futures price. I am under the impression that a larger percentage of cattle on feed going forward are under retained ownership. This leads me to believe the ability to profit from this decision is more crucial as it may be a one or two time ordeal, instead of every month where averages would help smooth out prices.
It's not the cattle market that is of concern. It is the consumer. More often than not, an action takes time to see if it works or not. You plant a seed and you have to wait to see if it grows. I think the Fed is at a juncture where they have planted a seed of liquidity and may now back off some to see what affect their actions may have on the economy. During this time frame, along with the upcoming elections, consumers are anticipated to contract in discretionary spending habits, not expand. Beef demand was not quite up to expectations of the July 4th weekend movement. Kills will elevate and more beef will be produced. If the economy remains as is, maybe they will chew through it. If governors allow restaurants to open or can restore order from protestor's and riot's, then we could see a really good beef and cattle market. More of the same though leads me to believe the consumer will contract. If things worsen, the exceptionally wide spread between cattle and hogs may narrow quickly.
Feeder cattle have had the proverbial basis rug pulled from underneath them. The higher cash trade has pushed the index up to near even. The negative basis has been the only saving grace of backgrounders since 2016. The futures traders pushed the negative basis out over $15.00 several years that allowed producers to market inventory through the futures and then sold cash at what ever someone would bid. Now, those spreads are less than $3.00 negative in the out months. Traders were able to push feeder prices out of the triangular formation to the upside. As of yet though, they have not been able to exceed a previous high. I find it difficult to believe that there may be a shortage of inventory with the Flint Hills on the verge of moving inventory, as well as other areas now being impacted by the drought, steadily moving east. Some seem to think there will be. I'm on the fence. I know the cow kill has been elevated and winter loss significant for two years, but that is only seeming to produce a minor decline as the inventory report is anticipated to show a 1% decline in herd size and on feed numbers anticipated to remain elevated for months to come. These factors may be somewhat bullish feeder cattle were there not the issues of Covid and social unrest plaguing multiple markets for which to move beef through. As in the fats, I am not necessarily bullish or bearish the cattle market within their own fundamentals. I am bearish the consumer as I believe they will contract in discretionary spending going forward into the elections and holiday seasons.
Grains were soft this week. I have turned negative grains. More so beans and corn than wheat. Beans and corn both are not believed to have produced bullish patterns from their contract lows. This leads me to believe that the higher prices seen last week are part of a correction. This week, I had recommended to buy the November $8.60 Soybean put for $.13&1/2 to produce some leeway in cash marketing. ***This was a sales solicitation.*** Were something unexpected to occur, and push prices lower, the put option would help. Flipped to the upside, and the potential gains on cash would not take long to offset the option premium. I worry a little about the US dollar. The lower trade in it recently is believed to have at least helped in grain movement. Were further stimulus action deemed needed, it could throw a monkey wrench into the current down trend.