“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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5/2/2024

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Live Cattle:

Some are not familiar with what volatility is.  I think today's example will give you a good idea of how volatile the fat cattle futures market is. At the close on 4/19, the day of the last cattle on feed report, the June contract closed at $175.67.  The first move up was $3.13, the next move down $5.23, then up $6.08, then down $6.95 and now up $5.30.  That is a total of $26.69 worth of trading, up and down in 9 trading days.  The cash market remained unchanged in the south and $2.00 higher in the north.  This is volatility and it may not slow down any due to the excessive prices paid for feeder cattle and a great need to have fed cattle go higher to keep from losing as much money as they are. Then, there are consumers, grocers, restaurants and packers wanting cattle to move lower so they can produce margin for themselves.  This is a whale of a battle for which it leads me to continue to expect enormous volatility in a very wide price range.  As prices are trading closer to the bottom end of the triangle than top, and the basis significantly positive, it will not be surprising at all to see traders try to push June higher.  Of some interest on Wednesday was that the significant move lower produced an increase in open interest.  So, more traders are interested in Wednesday's price range than they have been in the past several weeks.  All in all, I think the past two weeks produced a great deal of excitement in the futures market for which there has been no fundamental changes to warrant such.   

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Feeder Cattle:

In my opinion alone, the spread between feeder cattle and fat is way too wide.  The expectations of higher fats, or lower feed costs, are not creating the profit potential some have anticipated. Actually, it has created a string of monthly losses to cattle feeders.  I expect now that it seems unlikely the consumer will increase willingness to pay or consume more anytime soon, and it appears that retail prices will remain strong. If so, there will be less need to bid higher for feeder cattle inventory.   The arguments of running out of cattle are thinning.  Everyone knows that now.  Most in the industry have made exceptions or worked into production the knowledge of the shorter herd size. The agenda continues to work to produce more beef with what we have.  My analysis suggests to anticipate a narrowing of the spread between feeder cattle and fat cattle.  Especially when I use the feeder cattle index, that moves very slowly and to the tune of only producers.  This helps smooth out the price fluctuation more so to the fat cattle futures contract.  When I look at the index versus the December futures, the spread today is approximately $61.42.  The high close of the spread has been $71.20.  The most recent low in April was $58.03.  I expect the spread to narrow under $58.03 suggesting either the index lower or fat futures higher.  It would not surprise me to see a little bit of both, but with corn not going down, and fats not soaring higher, something has to give and it appears the feeder market is the best place to attempt to cut costs.  Watch for some divergence of basis as futures traders are expected to be more willing to pay premium than a cattle feeder. 

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Today's price action offered some opportunities to create marketing parameters.  I posted a recommendation today, and through the day, the significant price fluctuation changed the strikes and premiums.  So, consider your marketing's for this fall and consider where the market is, where it has been, and the expectations of where it may go between now and the marketing of your cattle.  Once the first two are noted, then consider the expectation and build your parameters around those prices.  Using the triangle lines may help to produce areas of interest.  I think it possible, but unlikely traders will test contract high of the August and out months of this year.  If they do, then you will have a good aspect that new historical highs are being made in the index as well.  If they don't then your parameters should allow you to get very close to contract high for most months, yet still be locking in a minimum sale floor within a few dollars of the current, historic index high. This is a sales solicitation. 

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Hogs:

Hogs are believed in convergence with the index.   

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Corn:  

The grain rally was specific to the beans with news of a strike in Argentina.  This rally has pushed spot months to $12.00, but didn't add nearly as much premium to the new crop.  I believe this rally an opportunity to market new crop beans and corn.  This is a sales solicitation.  I understand there will be a great desire to "wait and see" if there is more to the rally.  There may be, but for the moment, I continue to recommend laying off risk.  

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Energy:

The volatility hasn't slowed with multiple trips above and below unchanged today. With diesel fuel in a bear market, crude forming one, and gasoline believed topped, I expect energy prices to soften significantly.  

Bonds:

There remains significant selling in the bonds, but by this afternoon, it began to dry up.  I think were the issues with Japan to begin being resolved, it would relieve a great deal of the selling pressure on bonds. The US dollar is believed topping as well.  The Aussie dollar has my attention to buy again.  I recommend buying the Aussie dollar with a sell stop to exit only at $.6490.  This is a sales solicitation.  The weekly and daily charts on the Aussie dollar are below. 

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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.