“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

12/8/2023

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Live Cattle:

In my opinion, cattle feeders got busy this week procuring inventory at the best basis spread of the year.  Not only that, I have heard of light weight cattle being gobbled up for wheat pastures and the longer growth time frame.  As they are spoken for, I anticipate the demand to climb the weight ladder and move on to the heavier weights.  Were the industry to catch wind of better times coming, the futures would be anticipated to leap forward, and change basis back to negative.  While basis is in your favor, especially those that managed risk and are short hedged, get everything wrapped up sooner than later, to achieve recent basis divergence.  Going forward, I anticipate the division between those that manage risk, and those that do not, to widen.  There is little to discuss about the decline going forward, as what was once anticipated, has now come to fruition.  There may be some lower trading, but it appears the bulk of premiums on futures have eroded, and the cash market decline, a pretty normal 11% correction from the top.  The agenda at hand is to grow more beef per cow, further utilize the dairy industry for beef cross, and continue to import more meat and export less.  I don't expect this agenda to change until after the first quarter.  First quarter beef production is slated to be large. Packer's, with margins in red, will most likely not want to facilitate a slaughter pace that would further erode margins.  Therefore, with ample cattle on feed, nearing 12 million, and weights already performing at new records, this agenda is anticipated to last through the first quarter.  At the same time, first quarter placements are anticipated to be light.  I think the increased placements from Mexico will soften, and most likely some expectations of holding back heifers could make for this. January seems to be second only to July in the volume of marketing's of stockers and feeders.  The feeder cattle placed in January will be summer beef.  Anything not going on feed is most likely destined for a wheat pasture.  I have urged packers to own the June and August live cattle contracts to take advantage of the change in basis.  If January is as low of placements as anticipated, the shortage of cattle may begin to be reflected again in price for summer cattle.  Time line is the highest priced feeder steer placed in September will kill in February and the higher placements in October, and possibly November, will die between March and April. After such, I would anticipate fewer cattle on feed going forward.    

 

Grain traders have tried for a few weeks to push corn and beans higher.  When Friday's WASDE report was released, those rallies faded quickly.  I anticipate corn and beans to trade lower and have recommended all week to sell March corn with a buy stop to exit at $5.00, and to buy the March soybean $12.50 put options.  These are sales solicitations.  Having been wrong on my energy analysis, it takes some of the support from biofuels, and therefore corn and beans.  With the South American crop going to be big, and world stocks elevated, there is a lot of grain and oilseeds to market in the coming months.  I am still wrong on energy moving higher.  Whether I am right or not on it moving lower now is yet to be seen.  However, there are some rumblings now about how the Saudi's may open the spigot to drop the price of crude below US production costs, and since they have a lower cost of production, their demand remains and still profitable. Bonds continued higher up to Friday's Unemployment report.  It showed more jobs created and caused a correction in the bond trading.  I anticipate this correction to be a minor wave 4 with still higher bond prices anticipated.  The Fed is dovish and not anticipated to raise rates in the December FOMC meeting. 

 

Lastly, there has been great discussion on the cattle market, and who is to blame for the recent decline.  There is no one, or any single entity to blame.  There is no insurance company in trouble, or is there going to be any LRP that is not paid off when the sales receipt of the cattle is presented for payment of the LRP.  The total value of the feeder cattle futures market today, via the feeder cattle index, is approximately $5.6 billion dollars.  I took 50,000 times the index at $2.2226 and came up with $111,130.00 per contract value.  I times that by the open interest of 50,782 to achieve the total value of the futures contracts representing the market.  Therefore, since futures market lost an approximate value of 12%, and that being approximately 8.08 million dollars, it isn't that much. I do know open interest was higher in the summer, and will skew the numbers to the levels of the difference in open interest, but I can't imagine any insurance company, backed by the FCIC, when no other agencies or commodities have had issues, having a problem paying off the claims on this amount.  I understand that is just the futures market, but I believe that the futures represent equal or more cattle than LRP's. As the LRP's are backed by the The Federal Crop Insurance Corporation, a wholly owned government corporation within USDA, I think it improbable that there will be any default of the LRP policies. 

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Feeder Cattle:

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Corn:

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Energy:

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Bonds:

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This is intended to be or is in the nature of a solicitation. 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 the 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.