Swift Trading Co.

"Shootin' The Bull" Weekly Analysis...

For the week ending November 15, 2019

In my opinion, traders paused this week in their aggressive buying of futures.  Open interest has increased and decreased this week, where previous weeks have been higher through the week.  A new contract high was made in the April live cattle contract.  Without a doubt, considering the significance of the decline, the fundamental factors that played out, and now a new contract high, is one impressive trading time frame.  I would urge you to not be too critical upon yourself, as these are price moves that do not normally occur.  They occurred because of the severity of the fundamentals.  I think as the severity of continues to diminish, prices will begin to gyrate more, and trend less over the next several weeks.  There should be no weeping or gnashing of teeth for this feeding time frame.  Believed commodity fund participation in the market has driven futures to exceptionally wide negative basis to the December, February, and April contracts.  This is advantageous to those marketing inventory. 
If you are experienced, and comfortable enough using options strategies, you can create leeway in your hedge in which you may or may not benefit from a higher sale price than at present.  Other analyst tout the large, near record, number of cattle currently on feed.  No doubt, consumer demand has been excellent.  It may remain excellent.  However, with the supply side believed not going to change much in the next 12 months, demand becomes front and center.  At present, the consumer appears in good shape.  The political and economical rhetoric being spewed across the air waves is enough to make all of us sick.  However, it is there and must be watched to see if it impacts consumer discretionary spending habits. 
Feeder cattle and stocker sales have been elevated the past two weeks.  I am hearing that some of this inventory is going straight into feedyards and bypassing wheat pastures.  The elevated sales, in the shorter time frame, leads me to anticipate a small mole hill of feeder cattle inventory to hit between February and March.  This week, all of the spring contracts traded into a negative basis at one time or the other.  This is an anomaly, as basis is more often $4.00 to $7.00 positive to the spring months.  While there has been little advantage of premiums in the futures, the tightening of the basis is significant for those hedging inventory.  By Wednesday though, the basis had pulled back to a more normal positive spread. 
I am not bearish the feeder market due to the belief expansion has been halted.  I am not bullish either due to too many factors impacting consumer demand.  Were consumer demand to be impacted, it won't matter how few cattle are left.  With the year winding down, so to will sales.  I don't anticipate much more price increase without a correction of some significance.  I continue to believe that just owning the January or March put options to be the best derivative to manage risk at this time.  It leaves the top side open and protects the downside.  Were there to be another move of significance, up or down, then potentially there could be some adjustments to be made of the hedge. 
The tariff issue is now just blah, blah, blah.  We all are aware of the meat protein shortage and the antics pulled by the Chinese to circumvent the US.  There are few surprises left and I believe that is what is keeping hogs from bolstering higher.  They already carry huge premiums.  Corn is dying a slow death.   News appears bullish or at least friendly. I think humans have grown tired of buying friendly news.  This leaves the Algo traders left consuming themselves or not participating.  I anticipate energy prices to trade lower.  Traders have formed a large contracting triangle.  I anticipate the break out to come to the downside.  I recommend only topping off farm tanks when needed. 
Lastly, with the Fed's actions from the previous week now being acclimated into the market, it is a little scary.  There is a continual push of short term liquidity into the markets.  At first, bonds sold off sharply, as was most likely intended.  By the end of this week though, bonds have perked up.  Bond prices moving higher is not the intended direction. The Fed wants inflation and a lower price in bonds would be reflecting their desire.  Bond prices moving higher suggests that their intentions are not being met.

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
An investment in futures contracts is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits.  You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources and other relevant circumstances. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

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