"Shootin' The Bull" Weekly Analysis...
For the week ending June 28, 2024
The feeder cattle complex consolidated further this week in the face of a record high index reading, some $200 cash trade in the fats, and corn with a 3 handle after today's acreage report. The 5-day weighted average was 194.77 and cash later today is expected to trade higher. PM choice boxes today were up 2.99 @ 326.32. The dichotomy between optimism on social media and the lack of optimism on the futures board is perplexing and something that needs to be watched. Why are feeders not rallying on lower corn? Why are the premiums no longer available in the deferred months? These are questions that producers and lenders are asking at the moment. There are some changes happening in the entire commodity complex that make risk management more important now than it has been in recent past. Cattle are near record prices while short positions by outside money in the grain complex are being added to. I don't think it would be unfeasible to argue that at some time this could happen to the cattle futures. Premiums were targeted in the back months and now that they are gone, what's next? I hope I'm not sounding too negative here, but the boat appears to be loaded heavy and producers are underhedged. Another consideration is consumer discretionary spending. Although still strong at the moment, a pullback in the equities market could change the narrative.
So how do you manage risk in this environment? In my opinion, put options are not cost prohibitive at the moment and leave the top side open. What's surprising to me is that many producers don't use them because they don't understand how they work. Your broker should take the time to make sure you understand all risk management tools, including options, before a trade is ever placed. There are many ways to approach risk management and I encourage you to find one that works best for your operation and risk tolerances. If you are new to this, the CME website has a great learning center that outlines futures and options trading strategies that will help you understand how they work and if it's something that will benefit your operation. I'm always a fan of working averages in risk management. If you have 20 or 200 contracts to sell to be at your desired level of coverage, that trade can be done a few at a time and it takes some of the guess work out of picking a top. The challenge of this approach is that if your operation is smaller and you only need 1 or 2 contracts to market your inventory on the board, timing those sales can be trickier. If this is closer to what your operation looks like, consider options. I'm referencing buying put options with some time. While it's true that most expire worthless, understand that there are thousands of options being written with strikes that are so far out of the money that have very little chance of having any value at expiration unless something catastrophic happens. I'll never forget calling my FCM in Chicago the day crude went negative and the person on the other end of the line saying that some negative $100 crude puts were being offered. Options are an odds play and those with strike prices close to the money have a much higher chance of having value at expiration than those with far out of the money strikes. Options are a different animal than futures, but it's worth taking some time to see if that is something worth having in your tool belt for future marketing decisions.
Today's acreage and quarterly grain stocks reports showed more acres planted and more carryout that the average trade expectations. Corn was down 20 cents at one point and the Sep contract briefly went below $4. Great if you are a cattle feeder, but not so much if you grow corn and still have to price it. Although we are still a long way from the US crop being made, today's report numbers will be a headwind for the US farmer. Outside money tends to buy strength and sell weakness and $3.50 was support for a long time before the Ukraine conflict. We usually get some volatility during the summer growing season in the grain complex and bear market rallies can be impressive- I recommend having target orders working if you need to price your '24 crop. This is a sales recommendation.
Chris Winward -- Swift Trading Company
