“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

6/2/2023

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Live Cattle:

In my opinion, the short squeeze on retail grocers, packers and feed yards is believed to have popped this week as cash traded higher and futures sharply higher.  The anticipated slowing of consumer demand is very slow in coming.  This has kept feed yards from putting additional weight on cattle that is believed needed and applicable to do. As all input costs to the cattle feeder increased this week, especially the feeder cattle, the extensive capital requirements to produce a pound of beef are believed reaching, if not already exceeded, any previous highs.  Futures narrowed the basis spreads quickly on Thursday and Friday of this week to close the spread to cash.  Playing the hand to mouth purchasing scheme didn't work as well this time.  Consumer resilience to the higher prices is believed nearing a point in which an impact could be felt. I fully understand this is a broken record idea for the past couple of months.  Friday's employment report, when combined with the passing of the debt ceiling, is about as good of a stimulus production than most anything else.  While those on the government dole will continue to spend to the level given them, I am not as sure that the employment increase will be as much of a stimulator.  As the increase of employment may suggest that consumers will have more money to spend, the other side of the equation suggests that consumers are broke and having to go back to work.  Nonetheless, cattle are high, and the capital requirements to sustain business elevated to a point in which a reversal of fortune would be anticipated to severely impact producers in every sector.  

 

Backgrounders continue to hold the high cards with futures premiums reflecting new historical highs. Although this will make some cringe, in all honesty, as bad as the margin calls have been, and what you may or may not have missed out on, but you need all the higher futures you can get to either hedge into, help to pull the cash market higher, or achieve full convergence of basis. So, while the pain of margins is immense, and could get a whole lot worse, know that you need this, because the alternative would be considered disastrous.  Imagine not being hedged, the cattle feeder moves into a more reserved bidding mode, and more likely than not, futures would plummet to the levels of cash.  Again, you need and want the higher futures price, even if it is painful at the moment in order to achieve full convergence of basis.  

 

Something to consider is that if there are going to be fewer cattle to fight over, and expansion most likely 2 to 3 more years down the road, cattle feeders may have to make some very difficult decisions as to how to continue. I don't think that cattle feeders can continue to bid against one another to make sure their hotel is full.  If they take a cue from the packing side of the industry, it may come to the point in which one feed yard buys another and mothballs it forever.  Capacity to utilization is in all manufacturing businesses. In this case, there is more feeding bunk space than there are cattle.  My analysis leads me to believe that the cow/calf producer will struggle to sustain the current herd size it is now.  Liquidation has slowed, but not stopped and there just isn't enough hay production in some regions to hold back heifers yet.  So, if others begin to see where they will have to just keep bidding higher against the competition, weakening both, one may buy the other out and close it to reduce feeding capacity, therefore lowering the demand for feeders. 

 

Grains have been all over the place this week.  Weather is causing a few hiccups, but all in all, the crop appears in good shape and growing.  Demand is believed weak domestically and not found anywhere in the export markets. I anticipate grains to trade lower.  Energy perked up towards weeks end, but still in a down trend.  Interest rates at the first of the week shot lower, but by Friday's close, the increase in employment began pushing them higher.  It appears that retail inflation will stay elevated through the summer, but commodity inflation mixed.  Biden's America continues to be in disarray with our elected congress and senators voting this week to put the US further into debt.  The hypocrisy knows no end. 

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Feeder Cattle:

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Lean Hogs:

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Corn:

"Soyalism."  I think this is a good documentary.  

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Energy:

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Bonds:

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