"Shootin' The Bull" Commodity Market Comments...

For Thursday, November 30th

Live Cattle:  I recommend packers buying the June and August live cattle contracts.  This is a sales solicitation. If futures are undesirable, I recommend buying at  the money call options.  This is a sales solicitation.  From a speculative position, I recommend buying June live cattle when risk can be managed with a sell stop to exit only at $166.45.  This is a sales solicitation.  I anticipate the September, October, and November placements to keep over 11.5 million head on feed out to March.  As well, conversations today about a lot of open cows in the north leads me to anticipate a larger cow slaughter in the first quarter.  So, I don't foresee any shortages of beef production out to March.  However, if placements in the first quarter are light, it could begin to make for fewer cattle by the summer grilling season.  While very counter seasonal, but it would not surprise me to see April fat cattle trade under June fat cattle by expiration of the April contract.  
Is there a way to divide the commercial cattle feeders, from the individual or custom cattle feeder?  Having a little knowledge of a few of the larger feed yards, and believing they have a very strenuous risk management program to help produce a more stable return. I have a hard time believing that very many commercial cattle operations were hurt severely by this.  If there were a way to segregate the participants, it may be easier to see how fast prices come back, or not.  That is because if there is a larger percentage of commercial that use risk protection, they are able to simply continue with their production scheme, buying all the time.  For the smaller ones, that rely on marketing what is on feed now, before they can buy the next round, if they are a small portion, we could see them continue to lose money on the fats on feed, and about the time they make their fat sales, feeder prices have already risen sharply, due to commercial buying.  So, some sort of division between the two may help in deciphering the timing of the wave count.     
Feeder CattleWe work very closely with lenders to help them manage the risk their clients assume.  If your clients need help, call us. 
The decline in the feeder cattle index has been minimal.  It is down 11.5% from its September high.  Yes, it does seem like it is more than that due to the extent of the decline in futures.  However, recall that futures were trading at $20.00 to $25.00 premium to the index.  The next most probable move is believed going to be dictated by the cattle feeder, and no one else.  The even basis suggests prices are where they should be.  If futures go down further from here, it must mean that traders believe cattle feeders will pay less for incoming inventory, therefore impacting the feeder cattle index negatively.  My analysis suggests a major wave A has been completed with a major wave B correction anticipated. Major wave B could take weeks, if not a month or two to complete and there is no telling what the retracement levels will be.  Remember, for the futures to move higher now, there would need to be some connotation of the cash market moving higher.  As above, with feeder cattle prices down only 11.5% from the top, this may not be much incentive for cattle feeders to start increasing bids just yet.   The calf market continues to be high.  The margin to backgrounders is tight.  I am reluctant to lay off inventory on the board just yet against anything newly purchased calves.  I think using the current weak time frame to procure cattle will be as much of an advantage as the rich premium of futures was to producers through the summer.  I recommend cattle feeders to buy the at the money call, and sell the $10.00 to $15.00 out of the money put in the contract month they will be procuring cattle.  This is a sales solicitation.  You will need to be ready to buy cattle on the last trading day of the expiring contract month to achieve the potential low of the sold put strike price, or if prices are higher, use the proceeds to help offset the higher price.  March closed at $222.35. The index at $224.77 makes for a $2.42 positive basis.  Look at buying the $224.00 call and sell the $210.00 put for a premium of approximately $4.15.  Now, anything above $228.15 and proceeds go towards the purchase of the higher priced cattle.  A trade under $210.00 and you will be buying cattle at $214.15.  With the index currently at $224.77, you can buy cattle $10.62 cheaper than at present, with an unlimited amount of potential proceeds to go against your purchase if higher.  Anywhere in between the two strikes and you pay $4.15 more for them, regardless of cash price. That is because you will lose the premium you paid for the spread. 
CornCorn rallied.  Until March trades above $4.96&1/2, I think this could be just a minor wave 2 correction.  Wheat is believed to have reversed, but still needs to clear $6.50&3/4 July Chicago before it can be confirmed.  Beans were soft and continue to trade in a well worn range. 
EnergyEnergy traders damn near cut the tree down to shake out the bulls today.  Traders pushed crude to a new high over the past two weeks of trading before pummeling it down to under Wednesday's low.  So, this issue of high volatility is not just in the cattle markets.  No doubt, fewer human traders and more computer generated trades is a cause for this.  As much as I dislike having to admit I am wrong, were crude to begin trading much below $74.00 February, it would lead me to anticipate the low of $72.53 being exceeded.  If that low is taken out, I would fear a massive recession is underway.  
BondsBond traders peeled a point off the bonds today, but not before making a new high from contract low.  I anticipate bonds to continue to move higher. If they do, it would be another clue that recession could be more prevalent the inflation.  Worse, more stagflation.  

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.