Live Cattle: While unsure if a higher fat price this week will turn negative margins to plus for cattle feeders, I can't recall a time when the industry has been able to have its cake and eat it to. The higher cash trade has been followed closely by futures with some basis improvement, but new contract highs to work with. Even the discount to the back end, where most of cattle placed in the next two months will arrive, is offering producers the ability to market at never before traded prices in these contract months.
A reason to address the back end more aggressively is due to the current drought, amount of working capital being placed into cattle during a major drought, and potential to force more cattle into yards.
Another reason to address the back end is the amount of working capital being put at risk today. There is evidence that beef demand is not as stellar as it once was, with a swap in price for select over choice, and significant manipulation of slaughter and production that has significantly increased beef production and kept cattle production in check. Using corn and crude oil as examples, both had significant price gains in the past for which forward contract months did not participate to the same extent price wise. However, regardless of contract year, all made their respective contract high at the same time. December of '25 corn made it's contract high within a few weeks of the December '22 in April of '22. Fast forward, and the contract high held for 3 years when expired. Today, crude oil is similar. Back months are discounted heavily. However, I would dare to say there are traders for state run oil companies and countries that will be tasked with marketing months to years of production, out into the future, at steep discounts to today. Why would they do such? It is possible that even with the discount, it could be the highest price ever achieved until delivery is made in the future. At present, there is only a 4% discount to the back end of this years contract months for fats. Again, the structure of the basis, new contract highs, and only a 4% discount to the contract months you will be marketing today's feeder cattle into, seems almost a little too good to stay that way.
Pointing out all the factors impacting producers has no bearing on price direction. Cattlemen continue to have too much production capacity for the amount of inventory to produce. The new contract and cash highs for cattle point to a new level of rationing. Just knowing the extent of what is facing producers, in light of all time capital outlays', leads me to recommend making some difficult longer term decisions for which there is no doubt that hindsight will be clear as a bell.
Feeder Cattle: As above, a new level of rationing has begun. You have never had this much working capital at stake for any weight class you work with. Outside of the cattle input costs are elevated as well with corn not even in the ground yet, but only about $.25 off it's lows. Fuel has come off it's high's, but still $1.40 higher than when the military action started and interest rates having risen, due to the current spurt of inflation. At this new level of rationing, how one manages the risk they are assuming will be crucial. Cattlemen dislike the clarity of hindsight of what could have been made, and margin calls. This is believed keeping producers from as astute as they could be in marketings. Assuming more risk and using less risk management appears to conflict.
Corn: Traction is difficult to gain in corn and beans. Wheat, due to the current drought, and belief of less acres to mature, is believed in a wave 2 correction with a wave 3 rally anticipated. I made a recommendation to buy July or December Chicago with with a sell stop to exit only at $5.82 July and $6.10 December. Corn continues to struggle and beans are believed in a corrective phase of a bull market. I anticipate all to trade higher.
Energy: Energy continued to sell off today. The volatility and price expanse continues to be huge. With planting starting, and a great need for diesel fuel to plant 180 million acres in a 6 week time frame, work closely with your fuel provider to see if or when, and how much of, the $1.00 lower from the high you can achieve. While I don't recommend booking a full year, I do recommend topping off farm tanks and booking enough to get through planting. I continue to believe the pull back to be a wave 4 correction with a wave 5 to between $5.50 and $6.00 May heating oil. I also believe that crude oil can go down and diesel fuel go up. This simply due to refining capacity and a lot of oil to refine. This weeks oil stocks are anticipated to soar. So, focus more on the diesel fuel, as it drives the economy, war machine, and agriculture production, where as gasoline drives the consumer. I would expect the cash markets to carry large forward contract premiums, simply due to the volatility and no resolve of current events.
Bonds: Bonds and equities both ended the day higher. Money continues to be pumped into the system through quantitative easing, keeping the government solvent while on this spending spree. Servicing the US debt is a reason as well. Not much seems to have changed in this from the Obama era. In that time frame, the economy was likened to a balloon with a lot of holes in it. Instead of attempting to patch the holes, they just blew more air (money) into it until the intake offset the outflow. The large military actions taken appear to have poked more holes into the economic balloon for which now more money will have to be printed to pay for. Government spending is increasing at an alarming rate, as seen by the debt and amount of quantitative easing taking place to service such. Seemingly, there are a great deal of economic variations taking place, at the same time, that are keeping the economy from being cohesive. Mostly being further division between economic classes.
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
This is intended to be or is in the nature of a solicitation.” Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.
