In my opinion, drought is beginning to change some dynamics of potential for expansion. As there is little evidence that heifers are being held back, expansion appears to be still on the back burner. I think it possible that were the drought to move cattle early, it will make gluts for some time frames, and holes in others. This is not an uncommon factor, but this late in the year is when most production begins to slow down, instead of speed up. The drought may force movement greater than in years past. This would put some of the glut into the second quarter of next year. This has my attention at the moment. Margins appear razor thin or nonexistent at the moment for producers. The month of November and December will see the slaughter of the highest priced feeder cattle in history, via the feeder cattle index. The packer this month cut kills again and was able to achieve about a $25.00 higher box price, while only running fats up about $7.00. A lot of shifting is believed being done to make ends meet for consumers and increase margins for producers. From my stand point, there will be little to do going forward, as recommendations to own the at the money put options on inventory in the month closest to marketing, will produce sufficient downside protection were adverse price fluctuation to arise. I have to believe that the increased rationing this month helped to reduce demand. Boxes finally started to soften at weeks end and the feeder cattle index a little lower as well. Cattle feeders have few choices when it comes to creating margin, with how much they pay for the feeder cattle the most important.
I spent this week attempting to turn variable costs into fixed costs. When viewing storage for corn, it appears that with a $.06 carry at elevators, the board is the cheapest place to store corn at about $.0350. Therefore, for 7 months, instead of paying $.42, you pay $.2450. For the $.1750 you are saving, buy the $4.60 July corn calls. This is a sales solicitation. This won't help or lock in a basis, but will the price. As well, I have a great concern over the world at war. When Asian soldiers go to fight on European soil, combined with the middle-east conflict, that is a world war. I recommended this week to top off farm tanks, book some fuel, forward contract fuel needs, or buy call options of crude oil contracts in the months of heaviest usage. This is a sales solicitation. Oil is not cheap, and the Biden administration's policies did nothing to lower the price. Hence, any disturbance now would be expected to push oil sharply higher. I wrote quite a bit this week on me being scared. I wrote a comment on the oil market that sounded just like a scare tactic. When I questioned myself about putting out such, I came to the conclusion, I was scared. Therefore, I made the recommendations based upon current factors, with the forethought of, I hope I am dead wrong.
The cattle on feed report may have reflected some of the expansion still not taking place, as the placement number was higher than expected. For well over 19 months now, the on-feed number has remained above 11 million head with current at 11.6. Beef production from such is now greater than last year. The year of 2022 saw record beef production with 2023 down 6.5%. With 2024 running equal to last year, there just isn't a shortage of beef or cattle. There is a huge expectation of being short cattle and beef that may have been realized were it not for the agenda this year of increasing imports, decreasing exports, growing cattle bigger and continuing to explore the efficiency of the beef/dairy cross. So, this puts the drought front and center for a while. Drought continues to intensify, and aspects of expansion remain on the back burner. Drought subsides, and expansion could start pulling heifers out of the slaughter mix. Until either is decided, there is ample beef and cattle production for a consumer strapped with inflation and a government out of control in spending. I admit, I am scared that the current amount of money sloshing around, with automated trading programs, could create significant price volatility and expanse in a very short period of time, for which could be difficult to overcome, or have to make decisions under great duress.
Christopher B. Swift is 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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