In my opinion, the function of maintaining a historical high for cattle, when found to be no variations in beef production year over year, leads me to lean towards the trading being more of an attempt to garner more market share. As I have written about this multiple times, the industry is slowly, but surely, going vertically integrated and in such, the larger entities are paid more attention to. Hence some in the industry are in a growth phase. A few aspects of this are from clients, discussing fewer bidders in the sale barns and who those bidders represent. As we understand the commercial side of beef production is doing all possible, like building 150K head beef/dairy cross feed yards, and growing carcass weights, it is the smaller producer who is believed assuming great risk. Simply due to the capitalization of the commercial producer versus the individual, any loss of margin can be absorbed into the commercial more readily than the individual. Although we have found the consumer to be more than resilient towards inflation, there have been stark changes in the way they spend discretionary funds. Some of those spending changes are believed being reflected in energy prices subsiding from their highs. Especially diesel fuel, the energy source of production, manufacturing and distribution. The dramatic shift in consumption of more ground beef than cuts is one of the clearest shifts of most any consumer changes. I continued this week recommending doing whatever it takes to put a floor underneath your production. This is a sales solicitation.
Lastly is the continual wide spread between starting feeder and finished fat. With margins razor thin at present, huge losses in the past and expected losses in the future, were fats to not continue higher, a turn of events to negative would quickly expose weaknesses within the industry. On the flip side, a positive event may not do too much as prices are already sky high. When taking the above to heart, the next most probable move would be to pull the rug from prices, and let all those not as well capitalized, grapple with the price decline, and then complete the vertical integration by picking up the remaining pieces from those who did not practice risk management, or overextended themselves in belief markets go up forever.
As participation in the cash markets has been noted as thinning, I have little reservation is suggesting the same for human participation in the futures market. Although volume has remained somewhat steady, the speed in which prices move suggests more computer driven trading than human. As well, the contraction of price and even basis offers nothing to the producer in the way of benefit. So, more humans are believed in a wait and see mode, while computer generated trading creates a very volatile price range. While in the contraction of prices, those who want to manage risk are believed in a good position to do so, as prices have fluctuated within a range and still at the very least at an even basis. When considering the plethora of derivatives available to you, and ability to use some in conjunction with others, there is seemingly little reason for someone to be caught off guard, other than just doing nothing. Planning the marketings and hedges before prices begin to trend is believed crucial to keep from having to react, instead of act.
Grains are believed to have completed a minor wave 4 correction with expectations of a new low in both corn and beans. The loss of acres due to flooding or drought is expected to be overcome significantly by yield in both markets. The early development over the 5-year average is expected to keep frost from being an issue. With little to go in corn pollination and more than half the bean bloom done, this year's crop is expected to be one of the better and larger ones in recent history. Energy has been exceptionally volatile this week, but at weeks end, energy is lower. I expect energy to continue lower and due to the bear trend diesel fuel is perceived in, I recommend fuel purchases to be hand to mouth until closer to harvest or see some formation of a bottom. At present though, diesel fuel is in its fledgling stages of going back to a carry charge market, suggesting prices in the back months will be more elevated than the front. Hence, the longer you wait, there may be a propensity for the premium to seep out to the cash level. Bonds closed slightly higher than last week with expectations of a higher trade in bonds. Like other commodities, bonds have experienced near hyper volatility the past couple of weeks. In my analysis, volatility can be a precursor to a trend. The battle represented by the volatility eventually wears one side down for which then a trend may begin. As we have seen significant volatility in multiple commodities recently, it leads me to expect some trends to develop as one side wears the other down. Note the hyper volatility within all of the political administrations as they dodge bullets, coup attempts by their own parties, and simply just not in a formidable position to govern. This too is expected to subside into a trend, leading to either greater economic prosperity or worsening.
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.
