Live Cattle: An analogy I thought of this morning fits the cattle market. While this is a repeat of the Mid-Day Cattle Comment, it is what I believe is taking place. While I fully understand this situation is not a fundamental factor that would cause prices to rise or fall, it is simply the recognition of what is transpiring and what may or may not happen if you lean too far over to get the bait.
A tiger trap is where a deep hole is dug and covered with weak branches and leaves to cover the trap. Then a food item is dangled over it. Cattlemen and futures traders have built this trap. The combination of both has dug a deep hole that consists of a very wide positive basis with current price the bait to lure you over the trap. The trap itself is the $9.00 to $10.00 decline the index will have to make in order to reach current futures price. An even deeper trap will be the use of long put options as the futures discount, plus the premium for an option will make the hole $18.00 to $20.00 deeper. Note that the reason for the wide positive basis is to encourage you to sell today as there is no incentive to market at a cheaper price in the future. Ah, but not all cattle can be sold today, so if or when enough cattlemen continue to leap towards those high-priced cattle, something will trip the trap and there will be significant convergence of basis. What makes this even more dangerous is the time line. It is possible that the trap is not sprung, precautions taken at the lower levels, and basis convergence is detriment to the producer. All of the above suggests that cattle producers and futures traders have produced a very risk laden basis spread with every aspect of the outcome solely based upon the consumers ability to remain resilient in discretionary spending. This is a bad place to be and I believe the recognition of will help to you make the most informed decision.
The Punji sticks to the Tiger trap are the input costs. Now, obviously rising, and noted in both the PPI & CPI reports this week, input costs will continue to have cattlemen produce the most expensive beef there is. Will the consumer be as willing to continue spending at levels that will allow cattle/beef to appreciate with the inflation, or be detrimental. At this juncture, there is an extreme reliance upon the consumer to buy and consume beef at current levels. Were the per capita consumption impacted from a reduction of immigrants; more reliance will be put upon the consumer to increase willingness to spend. If you throw in the inventory waiting to come across the Mexican border, I see a great deal of leveling off in both supplies and potentially demand.
Feeder Cattle: Cattle feeders are taking on the weight of the world in ever increasing costs to produce a pound of beef. Nowhere more obvious than in the historical high price being paid for feeder cattle, with input costs on the rise. Backgrounders are believed caught right in the middle of the trap. It is cattle feeders, that are bidding up the price of feeder cattle, whether to place or further background, keeping the price of feeder cattle at the tip top. It is the futures trader, unwilling to push futures prices equal to or greater than the cash market that creates the spread. Hence, their skepticism for higher prices in the future have created a sizable positive basis spread for which all producers will have to contend with. If you want, need, or have to take some form of price protection, then it will come at a discount. If only using a long put option, the premium will push the minimum sale floor even further away. The basis spread is damning at the moment for producers with the price spreads screaming to sell now as there is no higher price in the future. This is a difficult situation. As stated months ago, there are some who wished to achieve vertical integration and I am hearing of more and more that have been formed. This is a dramatic change in the industry for which there is too much production and processing capacity for the amount of animals available. In industrial production, this is nothing new and seemingly takes a great deal of profits and losses to change. Cattlemen that recognize this are anticipated to fare better whether remaining in the industry or not. The future path of beef production will be more vertically integrated with greater production dictated by the corporates than cattlemen.
Hogs: I am at a loss on hogs.
Corn: Corn higher and beans lower today. I recommend buying November soybeans when risk can be managed with a sell stop to exit only at $10.00. This is a sales solicitation. I recommend adding to or initiating long call options in the July corn were it to retrace in price to $4.80. This is a sales solicitation. I am friendly towards grains and do not recommend making any new crop sales yet.
Energy: Energy was sharply higher in crude and the products. Crude now trading at $80.00 a barrel and spot diesel back above $2.60 will begin to be reflected at the retail level soon, if not already. Previous recommendations to fix some variable costs are paying off now. I expect even higher energy prices.
Bonds: You may recall a couple of weeks ago when the Fed lowered rates, I made the statement that banks will do very will with the spread of lowering Fed window rates and raising retail rates. Well, here is the proof off the Dow Jones Newswire: Profit at Goldman Sachs more than doubled, while JPMorgan and Wells Fargo both posted hefty, forecast-beating profit rises for last quarter. For its part, Citi swung to a profit and per-share earnings beat consensus expectations. That is a pretty sharp return on not having done anything. The Fed lowered rates and the world is trying to stamp out inflation and created a windfall for banks. Bonds rallied off contract lows today upon the release of the CPI. Both the PPI & CPI showed lower inflation over previous months when excluding food & energy. When included, both were higher. Maybe the inflation is beginning to impact consumer spending, but not much can be done about commodity inflation. Commodity inflation is damning to the consumer as they are primarily a necessity of life. Durable goods can be repaired or some done without. Cars and houses can be fixed as well or let run down and still usable. Food and energy though are nearly daily necessities for all and the price of is going up.
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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