In my opinion, the old adage of "markets can remain irrational for longer than one can remain solvent", couldn't be truer today. If you have never seen the movie, "The Big Short", I highly recommend you do so. It is a literal documentary of the 2008 financial crisis. A portion of individuals could see what was coming, and made the appropriate trades to capture. However, it took much longer for the markets to break, causing great financial strain. In the end, they were all correct and profited from their trade. I feel the exact same way. I feel as if my analysis is correct, but yet there appears an underlying agenda at play for which is perceived causing markets to remain irrational. With it nearly obvious that traditional manners of calculating cost of gains and sales on the hoof or rail, or even formula, are producing negative margins, what is the goal? It is believed increased market share. As I noted several times on Friday, the extent of irrationality widened as the starting price of feeder cattle creates a nearly impossible margin of profit in traditional marketing formats. Therefore, this leads me to believe that there is an agenda at play for which increased market share is the goal.
Ozempic, and other appetite suppressing methods, are on the market to help combat weight gain. A quick search noted that 1 in 8 Americans have tried it with approximately 15 million taking some form of regularly. This was something I did not consider, but through conversations, it apparently is more widely known than I could have imagined. When made aware of, I can now recall about every other commercial on TV being some brand of an appetite suppressor. This morning it has been noted that mortgage delinquencies exceeded the 2008 financial crisis and a new low in new home sales. Credit card debt continues to soar and the feeling that inflation has finally begun to impact consumer discretionary spending, along with significant contraction in government spending, leads me to expect an economic down turn. When combined with beef production running at a stable 6% under all-time record production in 2022, cattle prices at these levels not only do not make sense, but are seemingly woefully over priced for the current and anticipated demand. As we can no longer rely on a rising box beef price to convey demand, it removes an important foretelling part of the supply/demand equation. The continual manipulation of cutting slaughter pace reflects the poor margins and to me, if demand were strong, they would not have to cut the slaughter pace.
The still elevated box price is believed an artificial reflection of demand. Next has been the cattle feeder manipulating weights in order to achieve the largest carcass frame possible in order to offset the egregiously high feeder cattle price and lack of profits under traditional feeding methods. Lastly is the seasonal tendency and you all know by now what that is. Long way around the barn to say that I believe cattlemen believe the price will go higher, with few others in agreeance. Therefore, whether cattlemen and futures traders continue to push prices higher or not, you have assumed the greatest capital outlay to date to produce a pound of beef with the circumstances of above pertinent at this time. You have a great deal to consider. How much risk you wish to assume and how much risk you wish someone else to assume, and how much you are willing to pay for that risk assumption.
Corn and wheat prices continued lower this week with beans finally capitulating on Friday. I recommend you consider two things over the weekend. For cattle feeders, it is to own the at the money July call options in corn. With having paid tip top price for inventory, the next worse thing to happen would be a higher feed cost. Therefore, this would help to fix some of your variable costs. The second will refer to corn farmers to own the December call options in corn. While this in no way will protect or hedge any downside risk, it offers the potential to make more money if the price does rise, as well as relieve potential anxiousness of having to market into a bull market. I recommend corn farmers to own the $5.00 calls, or bull call spreads a dollar wide with a better than 3 to 1 risk to reward ratio. If or when strike prices or spread widths are achieved, one can adjust positions to take advantage of the rise through cash sales with only limited risk derivatives at risk. These are sales solicitations.
Energy broke lower and it is not because of any new wells, drilling, or anything else, but lower demand. Bonds were somewhat higher because the inflation is beginning to show impacts of slowing consumer spending. However, were rates to actually get a little lower, one will need to start considering locking in the lower rate on lines of credit. Excessive government spending is being reversed, consumer demand is being impacted by inflation, with retail beef and all cattle at a historical price.
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.
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.
