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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.

The Mid-Day Cattle Comment is a market commentary written during trading hours, providing subscribers with pertinent, real time information to help readers make a more informed trading decision. 

 

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“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

4/12/2024

Live Cattle:

In my opinion, not a great deal has changed.  The further recognition of discovering how to produce more with what you've got is having a significant impact on prices.  No doubt the bird flu may have been the primer, but the charge has been increasing beef production, instead of decreasing, due to multiple factors.  While we may not exceed last year's production, the increase from what was expected as the deficit is astounding.  No doubt cattle production may continue to decline, or start to level off, but the discovery process of how to overcome the lower herd size is expected to keep prices trading within a triangular formation.  I say that knowing that were new contract lows to be made, it would lead me to believe the discovery process has produced ways and means to keep beef tonnage elevated, well above levels previously thought by the industry.  Even USDA has made some changes to supply calculations due to the continuation of heifer slaughter. Evidence continues to be spotty as to consumer demand or shifts in.  So, when do we expand?  Potentially, never.  I know that is a tough pill to swallow, and who am I to make such a prediction?  Well, just two factors suggest that expansion just may not ever occur.  One is the continual regulations and limitations placed upon all livestock production. Carbon credits are a hot topic at the moment with expectations of using lenders to either restrict or enforce the increasing regulations.  This overreach will sour tremendous numbers of producers.  Further encroachment of government limitations, whether local, state, or federal, is obvious already.  With water rights the other hot topic within regulations, this factor will not go away.  Those well established with land not in production to use as carbon credits when mandated, are expected to fare better than those who may have to buy more land or buy the credits. Which leads directly into the second factor of investment and working capital.  Investment capital could come from a couple of different means as vertical integration will help to reduce some costs and potentially risk of adverse price fluctuation.  Working capital may have limitations on it from what was stated above.  However, regardless of that, money is expensive and rates are at their second highest level in 15 years.  The highs of rates in December of '23 are just a tad higher than at present.  So, whether buying land, equipment, or anything else on credit, it is simply going to cost more.  Then, there is rate of return.  Some have suggested recently they are able to lock in $100.00 per head profit with the slight decline in calf and stocker prices, and still some premium in the September futures.  At Friday's index price of $244.57, it suggests a single animal at 850# is worth $ 2,078.84.  At the $100.00 per head profit, that is a return on investment of 5%.  Significant work, risk, and potential death loss for a 5% return on working capital that could be placed in a 6-month CD and earn nearly as much, makes one think. It is the low margin of return in all sectors at the moment that is believed going to keep the cow/calf producers liquidating, instead of expanding.  Lastly, I have heard of a great deal of disbursement sales.  This is older producers exiting the business at the top.  Not only that, a great deal of the land in production will go out of production with a greater likelihood of remaining out of production than ever coming back.  

 

Cattle prices are in decline. The supply issues are so well known that if you feared running out, you have already done something about it and are no longer able to influence the market.  The funds have left the building.  The continual liquidation suggests there are few that believe cattle are going to go up at the moment. The trend appears well established, even though abruptly lower.  There has been a significant swap in basis.  This will help many as the spreads between contract months, and basis will produce opportunities that were not afforded at such a wide negative basis.  Especially the feeder cattle market.  The premiums traders offered producers to market into were second only to September of '23, with some actually higher as new contract months had come on the board.  With the triangulation of prices continuing, it looks as if buyers need to be paying close attention.  Regardless of sector, the change in basis spreads opens a lot of doors to them.  I continue to anticipate the triangulation of price with current lows at support levels.  Feed costs are not expected to be much of an issue.  The premiums on corn keeps me from forward contracting or buying futures or call options.  Go hand to mouth or increase storage as the cheapest time to buy corn is today. This week's WASDE report shows more beans and no less corn.  Friday's rally was interesting, but in my opinion alone, I think it was orchestrated to make some higher sales.  Farmers are encouraged to protect what is left and leave a little leeway for some higher marketing if presents itself.  If not, then you will want something priced at this level. 

 

More likely than not, this week's sell off in cattle had a great deal to do with the outside markets.  Gasoline and crude oil set new contract highs on Friday's trade.  The "pop" I heard in equities last week has continually let the air out with only a few patches put in place. I expect a significant decline in equity prices as a great deal of purchases is believed speculative and trading, rather than investing. Hence, few will want to ride out a prolonged correction.  While some are too young to remember, or don't care to study history, but know that when the S&P topped in 2000, it was 13 years before a new high was made.  Keep that in mind.  This would keep inflation moving as well with month coming out of equities will go into something else.  Probably not commodities, but potentially into debt instruments, land, and clearly, we see gold as very attractive as it made new historical highs again on Friday.  Bonds are expected to finally find a bottom.  I have expected a bottom, but up until Thursday's low was made, it had fallen another 3 big points.  The inflation data this week continued to showed it elevated.  I think this should create some shifts in discretionary spending that lead me to anticipate bond prices rising as the Fed will want to lower rates, but just can't at the moment.  It's difficult to foresee inflation subsiding much due to the excessive government spending.  It doesn't matter on what, it's excessive on everything.  

Feeder Cattle:

Hogs:

Corn:  

Energy:

 

Bonds:

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. 

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