Shootin' The Bull
"Shootin' The Bull" is a daily futures and commodity market commentary, written by Chris Swift, commodities broker and founder of Swift Trading Company in Nashville, Tennessee.
With over 30 years of experience in the commodity futures industry, Chris's technical and fundamental analysis is provided for his clients and readers in an attempt to make a more informed trading decision.
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“Shootin’ The Bull”
Commodity Market Comments
by Christopher B. Swift
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In my opinion, cattle producers were gutted this week. Lower cash and higher futures diverge basis and causes significant strain on working capital. As well, no break on feed costs with weeks ending trade appearing to break out to the upside for grain prices. I have made some very unpopular comments this week on the industry. My analysis suggests that cattle producers are at a crossroad. That being, one path leads me to anticipate a painful price decline, or price rally, that puts the weakest producers out of business. The other path leads me to anticipate the industry going the ways of subsidies. Neither are pleasant to discuss, but the production side of the industry has no leverage, many producers, and seemingly a lot of cattle to work through. The futures market continues to hold premium and be reluctant to converge with cash. So, going forward, anticipate more of the same. Convergence of basis not taking place until closer to expiration and the strain on capital to increase.
The feeder cattle market exploded on Friday afternoon, one minute to the 1:00 settle. That being, someone potentially unwound, wound up, or was blown out by a margin clerk, a spread that pushed March and April futures $2.00 lower in one minute and May and August up $3.00 plus in the same minute. I think to do this, it would have had to have been placed as a spread order or they just dumped huge buy and sell orders in at the same time. Either way, the spread between the March/April and the May/August was phenomenal in one minute of trading. Over the weekend, someone will have a more accurate answer to this.
Unfortunately, this situation only goes to further gut the producer. Backgrounders are seeing feeder prices plummet at present. If hedged in the summer months on newly purchased inventory, hedges are already wearing on working capital. The basis spread is anticipated to grow even wider going forward as there is some belief that cattle feeders will receive a signal from the packer that consumers are going to eat more beef at an elevated price level while inflation is rising that will cause the packer to buy more cattle and the cattle feeder pay up for feeder cattle. Without a doubt, cash and futures are diverging. As we know they will eventually converge at expiration of the futures contract, the length of time the divergence remains will continue to put a strain on working capital. A tale of two worlds may be coming about. I may not understand why, but I do know that a new contract high was made today the August futures and out months and a new low in the feeder cattle index today from its end of February high. This is a very egregious basis spread to producers who manage risk. So, what do we do now? I will work on that over the weekend. I'd like to see more information about Friday's excessive price move before determining what to do next. Seemingly, prices are telling us that there are too many cattle today and not enough 6 months from now. My clarity only lasted for minutes this week as perplexity of the situation grows.
Feed costs didn't miss a lick this week though. Further consolidation within a narrow range led to a breakout to the upside on Friday. Beans made a new contract high this week and closed the week at a new contract high. Corn didn't fare as well but was able to push higher and close higher than at the start of the week. Both corn and beans are believed in a wave 4 correction, leading me to anticipate a 5th wave new contract high for both. China's appetite for US grains has waned over the past few weeks. They may be getting a little hungry again. It is the demand from China that is anticipated to keep a firm tone on grains with supplies causing fluctuation. Hogs stagnated at the top. Energies soared this week with retail pumps showing a $.20 to $.30 jump this week. Lastly, bonds made a new contract low this week. The Fed presidents spoke from the same play list this week stating they were not concerned with the rise in commodity prices, they will continue with all resources to keep liquidity flowing and next comes another 1.9 trillion in stimulus. Prepare for further inflation and no recognition of from the Fed.
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