"Shootin' The Bull" Commodity Market Comments...
For Monday, July 26th
Live Cattle: Traders pushed futures a dollar plus higher on the front end. A trade above $130.00 October will lead me to recommend wrapping up any marketing's yet to be made. If this does not materialize, then a trade under $126.50 October will lead me to complete marketing's. The on feed report suggests ample inventory still to work through. The inventory report suggested the same. Some contend the 1% decline in calf crop to be approximately 500K head. As that is less than one weeks kill, when divided by 52 weeks in a year, that boils down to an approximate 1% decline of slaughter levels per week. I have seen more weeks than not drop by 5,000 head from one week to the next. Nonetheless, those still trading cattle futures apparently like being long or buyers and tend to have the strings to pull to cause some short covering that is believed moving the market, more so than actual buy and hold traders. I say that due to there not having been any increase in open interest as of lately. The negative basis is anticipated to continue to attract cattle. The seemingly significant profit margins of backgrounders leads me to believe that sector is running like a well oiled machine.
Feeder Cattle: Calf prices have moved higher, but the feeders have moved more and the futures even more. So, if there were ever incentive to do anything at the moment, it would be to market inventory. The new contract highs today are the first in 7 years for this time frame. As well, markets have diverged today further today. Convergence of basis should be starting, but it just keeps remaining wide on the front end and widening on the back. Of the most interest to me continues to be marketing inventory with the use of fence options hedges. Although capital intensive, the allowance of convergence of basis, coupled with the spread between the index and the short call strike price is believed exceptionally beneficial to producers. Giving the cash market some incentive to rise sharply to meet expectations of short call strikes has seemingly worked very well. When basis converges, if at the short call strike price, physical prices will have had to have risen sharply. If basis converges by the futures lower to the index, then the significance of current spreads is of significant benefit. I can't urge the importance of marketing inventory as close to expiration of the futures contract. I know that it can not always be done, but if a little timing were to be tweaked, and you use the futures market to hedge your inventory, it only makes sense that allowance of full convergence of basis would be of great benefit.
The Moore Research seasonal tendency turns south at the end of this week/first of next. The new contract highs being marketed into may or may not be met by the index. I recommend you keep prodding the cattle feeder to bid up for inventory and have those hedges on just incase the battery runs low on the prod stick.
Lean Hogs: Hogs struggled for most of the day, but finally got all contract months but February plus on the day. The August contract has been following the up trend line again. This time, instead of it following the bottom, the price fell through the line and is now following it with the highs. There are 5 waves now in the August contract with significant overlapping. This leads me to anticipate a resumption of the down trend. The basis has narrowed to within $5.00 to the index. That may be enough to allow for a little divergence.
Corn: I was quite impressed by the recovery today in corn and beans. I realize the momentum has gone and weather is most likely not going to kill the crop. With that said, traders shook off some negative news and factors today to still close plus. I look for traders to test the top trend line again. If this were to materialize, I would look for it to provide a marketing opportunity for farmers. I think livestock producers are getting a false sense of security. It remains a solid 60 days before enough corn is harvested, dried down and into a deliverable position. Combined with already high roughage feed stuffs, and movement higher in corn will be felt by livestock producers. Beans may be the first to move higher. That is due to bean oil and the weather aspects hampering the Canadian Canola the same as what killed the MSW. So, since bean meal is not the driving force, watch for direction of beans to come from bean oil and the potential further devastation of the drought impacted areas.
MSW continues to lag. With no improvement of the crop, the less than $1.00 correction in price, and near double bottom by a penny, I anticipate MSW to begin moving higher.
Crude: Energies firmed by the close today. The rebounding equities market seemingly rebounded energy as well. Seemingly, if there is no trouble in equities, there is no trouble anywhere. A new contract high in the energies will spoil my best laid plan to wait out a correction of significance in order to achieve a lower price for fall harvest. Natural gas continues higher as well. The west's water issues are dire now. More and more electricity will have to be generated with another power source than hydro. In those areas, natural gas takes the place.
US Treasury Bonds: Another volatile day for interest rates. I get the feeling there is something being played out in the bond market. Price action is believed excessive for this market under current conditions and verbiage touted by the Fed. Nonetheless, bond prices were sharply higher through the day and have collapsed to be trading lower at the close. The Fed's initial action to reinstate a store of value to the US dollar only knocked down a few commodity prices. Seemingly only grains and metals. So, if this is not working, I believe the next step will be to actually raise interest rates. That would begin to work on consumer inflation and potentially start to wean them off the low interest rates. The Fed was very specific in alienating commodity inflation from consumer inflation. As seemingly their actions are slow to take affect, another action is always anticipated.