"Shootin' The Bull" Weekly Analysis...
For the week ending August 12, 2022
In my opinion, if there is any truth to the old adage of "big crops get bigger and small crops get smaller", then this year is right in line with the smaller crop. With only admittance of a slight decline in yield by USDA, this leads me to anticipate them cutting the crop further in both yield and harvested acres going forward. That is why I think corn rallied after dropping a dime after the report. There is nothing at this stage that will increase yield or bring back damaged acres. So, going forward, I anticipate cattle feeders to be dealing with higher corn prices for the foreseeable future. Cattle feeders continue to see margins go from green to red or from red to burgundy. Whether selling cattle on the hoof or on the rail, sales of either appear to be not returning input costs or just barely. Even if profitable, the increase of working capital minimizes the percentage gains. The consumer is anticipated to be faced with mounting inflation again. The inflation reduction act is anticipated to cause significant inflation due to increasing government payrolls, and the new IRS employees literally sent out to collect their own salaries. As I do not anticipate them able to achieve collection of their own salaries, it leads me to anticipate more printing of money to go along with the subsidizing of chip manufacturing. As cyclical production is most likely needing to be replenished for the next go around, producers are anticipated to begin procuring supplies. This suggests higher energy prices as fall and winter retail inventory needs to be pushed into the system soon, increasing transportation needs. Harvest will add a little to this demand picture. As well, while there is somewhat a smooth spot of less world volatility, any disruption of would be anticipated to further the volatility and price expanse of commodities. All in all, this does not lead me to anticipate the consumer shifting back to a spending mode that would favor a willingness to pay more or increase consumption of beef. I see little to do in the live cattle futures market at this time.
Backgrounders continue to be privy to both aggressive buying from cattle feeders/deep pockets, as well as futures traders willing to not only assume their risk, but do so at significant premiums. This week, I had to come to the conclusion that outside input costs, feed, fuel, labor and money, no longer impact the decisions of cattle feeders when assessing the profitability of how much can be paid for an incoming steer and what they could be hedged for in the future. This makes the fundamentals difficult to assess. Nonetheless, with the cattle feeder still willing to pile on premium and the futures traders offering even more, the backgrounder continues to benefit. With the hedge strategy used, full convergence of the basis by the index rising to the levels of the futures, has increased the basis spread profitability considerably more than had the futures sold down to the index. I do not know for how much longer this sector can be privy to both strong cash markets and futures offering premiums well above. No doubt, they can remain irrational for longer than one can remain solvent. Technical indicators had been softening this week already. With Friday's lower close, they have begun to turn south.
Work this week paid off with the WASDE report. We have worked diligently attempting to secure as much feed needs as possible for clients before today's report. With the USDA only mildly accepting that this year's crop is not stellar, as the crop rolls in, I think it will only get worse. Today's trade in corn ended up a little over a dime on Friday's close. If you have yet to secure your needs going forward, I would urge you to sit down over the weekend, get those calculations in front of you, and begin laying out prices for which you no longer wish to assume risk at, and buy the call option strike price at that level. This is a sales solicitation.
Nobel Prize winning economist Milton Freidman made a statement that I have taken to heart. Statement HERE. That is, nothing can create inflation but the government. Having thought long and hard, I can't deny this. The government employees the most people, can print money, sets interest rates, and spends more than any company, producing nothing. Subsidized farming, labor, housing, food, and now computer chips bring no revenue to the government. Any new spending package is believed unable to be funded by an increase in consumer taxation. So, with the newest bill passed, it leads me to anticipate a resurgence of inflation. Bonds ended the week lower and well off their highs from earlier in the week. Lower bond prices suggest inflation. The US dollar index was lower on the week, potentially spurring exports. Lastly, energy pretty much held its own with natural gas and diesel fuel closing higher than last week. My analysis suggests to anticipate another bout of inflation.