Live Cattle: Still no let up in the rising cost to produce a pound of beef. With little to interject that hasn't already been beaten to death, an snippet this morning fromThe Ag Center, about a consortium of tech companies involved in food production that has created an algorithmic program to help plot the trajectory of price points in multiple cattle and beef markets. The more I tried to find out about, the more elusive it has become. It will be interesting if more information is revealed. Other than this, the fat cattle market was a little less interesting to participants with a minor decrease in open interest, the consumer handed another large price increase for beef today, and the CME group raising margin requirements on live cattle futures. The weight of the industry appears lying squarely upon the shoulders of the cattle feeder with beef prices and outside market indicators seemingly going to further test the resilience of the consumers discretionary spending habits. Feeder cattle were higher, corn was higher, fuel was higher and money a tad bit cheaper. The manipulation of packers is having a direct impact on higher beef prices. Shoving the higher beef price to the consumer is expected to further test their resilience of how much they can or are willing to pay.
Feeder Cattle: Just keep bidding remains the battle cry. Basis narrowed slightly today with futures higher. Futures traders continue to show more reserve in their desire to own "the" most expensive cattle than their counter parts in the industry. I expect a tremendous amount more price fluctuation and volatility than what has recently been scene. This suggests to anticipate both higher and lower. While still at the top end of the price range, a narrower basis, and the hitch pin held by the cattle feeder, backgrounders are urged to continue to hedge newly acquired inventory through any means necessary.
Futures contract secures your sale price upon entry with no leeway in either direction.
A put option on a futures contract will limit your down side risk from the strike price minus premium to where ever the low is. This has no margin requirement, unlimited upside potential minus the premium, but produces the lowest minimum sale price. An LRP policy will produce a similar hedge with some differences in action that can be taken with in the time frame purchased.
A fence options spread, consisting of buying the at the money put and selling the out of the money call, reduces the premium you would pay for the spread, has a margin requirement, and creates a marketing parameter between the two strikes. This can produce a higher minimum sale floor, but does limit upside potential to the short call strike price.
These are examples of what is available to you and a brief description of how they will accomplish what you are attempting them to do.
With this, consider how much of the inherent price risk associated with livestock production you wish to assume, how much you wish someone else to assume, and what you are willing to pay for that service. I get the feeling some may be fixing to throw in the towel for the opportunity to make an unknown amount more, while giving up a known price, or worse, realizing a loss prior to marketing and potentially not being marketed at a time when most needed. Like at historical highs?
Corn: Corn was higher. While potentially not a reversal, it is sure moving opposite from one would think with 4 million more acres going in the ground this year. I recommend cattle feeders continue with locking in input costs while some are still at lower levels.
Energy/Bonds: Energy was higher today in the products and pretty close to unchanged in crude oil. While I was anticipating a lower trade, to finish off the down move, it appears to have found strength enough to have actually reversed. So, while prices may fluctuate and trade a little lower, I am under the impression energy will trade higher. I recommend topping off farm tanks and maybe finish with fuel needs with planting around the corner. Bonds were higher and equities began giving back some of Monday's gains. I anticipate bonds to trade higher and equities lower.
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. .
