In my opinion, the volatility through week did very little in helping to decipher the next most probable move. There is a strong seasonality via the Moore Research for fats to trade higher from this week into the first week of July. Between this factor, and not much else transpiring, I could see traders keep prices in this week’s range for next week. Further volatility is anticipated as traders hash out the fine details of what the future holds. When that becomes more apparent, the price of cattle will be anticipated to start trending again. As it stands, due to the price having fallen before the creation of the stagnation, it leads me to anticipate a resumption of the former trend. With it believed that there are more feeder cattle outside of feedyards this year than in the previous 3, this summer’s grazing becomes all the more significant. When I say that there are more feeder cattle outside of yards, it may or may not be that there is a total increase of feeder cattle. Even if there are the same number or less than last year, they are not in feedyar's to the same level as in years past.
Therefore, outside the feedyard they have no date to die and continue to get bigger. So, when I look at when they will come in to feedyards, it does not appear that they will have increased in May or June. Were pastures to start going backwards in July, then a steadier stream of inventory will start to be marketed. This will help keep from a wall of fat cattle being built. However, were pasture conditions to remain good, then more cattle will come to town in a shorter time frame and potentially build a wall of fat cattle. I read a really good book recently called "Talking Big" by Tom Dittmer. He was the founder of Refco and was some more wheeler dealer. The book was entertaining, but the best part was that when I was with Bradford & Co., we cleared through Refco. I remember several of the stories of markets that were told in the book. What I didn't know was the relationship between Cactus Feeders and Tom. A really good read if you want to relive some of the past.
Basis is gone in feeders. Direction is the only avenue left with no basis. Therefore, risk has changed significantly and so to should your risk management. I no longer recommend you initiate synthetic short futures positions to hedge feeder cattle or fat cattle. The next tool in the bag for this no basis environment is a bear put spread, or just a put option. You do not want to sell calls with no premium in the futures. As stated above, there may not be one more head of feeder cattle this year than last year. It is where those feeder cattle are that make the difference and they appear to not be in feedyards. Two things are being accomplished in this current environment. One is that the profit margin for feedyards is increasing by driving the price of feeder cattle lower and maintaining a higher price for fat cattle. Second, the feedyard is shifting risk from itself to you. Many have suggested that instead of taking this price for the feeder cattle, they will simply feed them out. Hence the feed yard has shifted the risk of owning the inventory, to simply taking care of the inventory. At this stage assuming production risk seems significantly lower than assuming price risk. I don't know what else to contribute to the story as what has been stated in the past has come to fruition.
The spread between starting feeder and finishing fats has narrowed $13.45 since 4/16. This is a profitable direction for the spread to feedyards. Traders have decimated the wide negative basis spreads in feeders to near even. Lastly, going forward, much of the remainder of this year’s price movement will dictated by weather. Any further increase in corn prices will impact cattle prices. When pasture conditions begin to warrant moving cattle will play a significant role as well. Trickling off pastures will produce a slower pace of placements going forward. A change in pasture conditions could have significant numbers attempting to find a home in a shorter time frame. There is a lot of this year left with some significant factors to take place that will impact the pace of placements. With no basis left, direction will be crucial in how beneficial hedges may be.
Corn continues to move higher. At the close on Friday, the only profitable short positions would have to have been executed on Friday and at best have a $.02 profit at the close. I do not have a clue as to how high corn can go. That is because no one knows how many acres will be actually put in and then determine how many acres will actually produce a crop. The Fibonacci extension suggests that September corn could reach $5.70. With ethanol mandated and livestock not going to be starved, it leads me to believe there will be a scramble to own remaining inventory for the next 12 months.
My analysis suggests that a major wave 1 and 2 have been made in the corn market. I believe that with the new contract highs, major wave 3 is confirmed in progress. The length of wave 1 times 1.618% added to the wave 2 low produces a $5.70 target for the September contract. Basis will be crucial to set for buyers in certain regions. The impact at the epicenter will draw corn from around this area away from those in the area. Therefore, even if price does not go up much, the need in a certain area could have basis widen immensely until the need is filled. If you are not taking this issue seriously, or attempting to blow it off as nothing, I highly recommend you take another glance at the charts, the weather, and the aspects of pollination through the month of September.
Bonds traders held the shorts feet to the fire this week by not giving up much at all. I anticipate bonds to trade just a little higher and then begin to move lower. My reason is this, and not to be confused with fact in any way shape, form, or fashion, the Fed wants to continue to stimulate the economy. Bond prices have moved higher and therefore lowered the price of long term interest rates. This is to tempt the consumer into borrowing more money. A couple of the Fed presidents want a rate cut. I think the President wouldn't mind a rate cut. However, what none of them are looking at is that commodity inflation could be right around the corner. At just about the time the Fed acts to lower rates, the inflation train comes screaming around the corner and high employment, high wages, and cheap commodities meet head on with cheap money. At first, the margins between retail and wholesale price narrows before it is passed along to the consumer. Then with elevated employment/wages and cheap money, the consumer starts buying into products before they go even higher. Before you know it, companies’ margins are gone, interest rates are moving higher, their shares of stock begin to move lower and you have created one whale of a mess. Don't think it can happen? What if the President and China sign a pact that eliminates the tariffs and China begins buying as well. The commodities industry has been the redheaded stepchild for years. Few have bad mouthed the equities markets, even when it went down, because for the last 10 years, the government has done everything in its power to keep if from collapsing. What I know is in comparison to Apple stock, corn is cheap and the last time I looked, you couldn't eat a share of Apple stock.
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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