"Shootin' The Bull" Weekly Analysis...
For the week ending July 23, 2021
In my opinion, futures traders have remained the producer's best friend. Traders have been able to offset the selling to keep futures at least stable to moving slightly higher over last weeks close. This week, I recommended marketing October fed cattle with a fence options hedge strategy that consisted of buying the $124.00 to $127.00 put and selling the $130.00 to $132.00 call. This is a sales solicitation. Similar to the feeder market, this is not a directional trade. I really don't have much aspect of cattle prices moving higher or lower. If cash remains at current levels, then futures would be anticipated to converge to cash. If cash moves higher in the time frame, then the stopping point of the sold call options may have you marketing inventory at a 5 year high. Either way, it is the basis I am attempting to capture while limiting downside risk exposure. With consumers seemingly shifting or fidgeting with their discretionary spending habits, I don't foresee a nearby time frame for which they would increase consumption or want to increase the amount paid for product. When combined with processing speeds, that are not anticipated to change, it leads me to anticipate not much reason for fed cattle prices to move higher or lower.
Backgrounders have found the niche for the moment. The desire of the cattle feeder to continue to bid higher for inventory, and futures traders egging them on, risk appears to be solidly on the shoulders of the cattle feeder. Whether this is an actual ploy in an attempt to further vertically integrate the cattle industry, or just by happenstance that cattle feeders have so much profit to work with, I do not know. What I do know is that most of the working capital used is borrowed. This suggests that the marketing actions you take impact more than just you. The current wide negative basis that is believed exceptionally beneficial when managing risk may or may not stay. At the moment though, beneficial basis spread is available to you. I recommend you explore the options available to you in marketing this falls inventory. At Friday's close, all contract months were above $160.00. It has been since April of 2016 since the feeder cattle index was to $160.00. Not to say it will or won't, but the futures are already there, and the cattle feeder may or may not decide to bid that high for incoming inventory. I have little to go by at weeks end. The near proximity of today's close to contract high per respective contract month gives some the idea traders will break prices out of this range to send them higher. Others continue to believe the cattle feeder will succumb to poor feeding margins and slow the pace of bidding higher for inventory. I am torn between the two as either has potential. Therefore, without a clear direction from my perspective, I lean towards thanking the futures trader for pushing premium on the feeder cattle, allowing for marketing into the higher price of the future.
Grain traders are seemingly disregarding the upcoming week of increased heat and less moisture in the northwest portion of the cornbelt. Potentially there is a thought that the NW quadrant isn't going to make that much difference. I think it is huge, but the market on Friday didn't seem to care what I thought. Most have gone the way of now labeling price action as a weather market. It may well be, but corn took a lot of hits on the chin this week and still was able to keep from melting. The ethanol mandate being brought up to end, China suggesting they don't need near as much feed stuffs as they once did and the majority of the crop in a good condition rating were just a few factors that are perceived as negative corn. So, I am still friendly towards corn and beans. I believe the drought impact will be bigger than currently assessed. Seemingly from the day the Fed reinstituted a store of value to the US dollar, commodities have lost their upside momentum. I know that was the exact intent of the Fed, but unfortunately, commodity inflation is different than consumer inflation. To take it one step further, consumer inflation is rampant and further stoked by lower interest rates. Commodity inflation has been curtailed as the Fed's actions increased the value of the US dollar against currencies of countries we trade with. Basically just raising the price to do business with the US. I continue to be friendly corn and beans as it is believed demand is what brought prices higher, and that demand is not believed to have subsided.
Bond prices were sharply higher this week and presented an opportunity to use money at a lower price. Not all commodity price swings are beneficial to producer's day in and day out. However, when a commodity moves in price that is beneficial, I think it needs to be taken advantage of. Diesel fuel may not be at a level that is beneficial, so you only go hand to mouth for needs. At present, when searching for a commodity of benefit to readers, interest rates are front and center again. This week's decline in rates is urged to be used to lock in any previous higher rates or look to book your borrowing's now while rates are lower. Either way, when you are looking for market prices that are beneficial to your operation, the price of money is believed one of those at this time.