"Shootin' the Bull"

“Shootin’ The Bull”

Commodity Market Comments

by Christopher B. Swift

3/3/2021

Live Cattle:

Tuesday's Webinar can be found HERE. 

I apologize for not having the link hot last night. 

Futures and futures traders remain optimistic. Pent up demand is the rallying cry. No doubt there could be, but I remain unsure that a large swath of that pent up demand is not already at play. I have always appreciated opinion's and how different people look at the same picture. Today, an analyst was stating that the features in grocery store adds will help to move beef. If there wasn't excess beef to move to begin with, the features would not have to be issued. So, one side sees the features as a way to move beef, while the other sees too much beef that has to be featured to move. The shift to a negative basis encourages marketing at a later date. Cattle feeders will grow cattle bigger as they wait out the time frame for the higher prices. Unfortunately, there is no guarantee that the current higher price of futures will be available in the cash market at time of delivery or expiration of the futures contract. Producers are believed relying on significant shifts in consumer discretionary spending habits. Any new shifts in spending habits will be met with higher prices for literally everything. Hence, I see it difficult that beef consumption will increase as prices would be rising with everything else. How to change the leverage from the packer to the producers is a tough challenge that few want to tackle. The industry is grappling with ways to shift that leverage through means of legislation, mandates and requirements. These factors are costly to the industry and may still not favor sales as beneficial as some may think. Beef prices are believed elastic with consumer discretionary spending habits. The packer is believed to know through immediate data from groceries and restaurants about how much beef they have sold out front and how much more they may still need. With that information believed exceptionally reliable, the packer then goes to work on the number of cattle needed to fill the void. As I am seeing the carcass weights not having dropped but 2 pounds from the 2/27 USDA slaughter data, and kill levels elevated, I look for the packer to flood the market with beef in order to help accommodate the cattle feeders need to move backed up cattle. 

Feeder Cattle:

If I were to turn a blind eye to the fundamentals, the chart patterns appear bullish at the moment. Unable to turn a blind eye to the fundamentals, maybe I am reading the cattle feeder the wrong way. Maybe the way the cattle feeder will break the sector is to buy feeder cattle at such a high price, it does begin to drive other cattle feeders out of business. This would seem to be a very capital intensive strategy that were it to backfire, could cause irreparable damage to the industry. There is a definitive pie. Processing seemingly has a significant portion with only a few privy to. The production side has innumerable participants with only a small slice of the pie to share. So, I really do not believe that legislating, mandating, or requiring anything will change the aspects of the control processors have over producers. What will change it is a reduction of cattle or cattle producers. 

 

Lastly, if the number of producers is going to remain, anticipate the evolution of a subside program for either beef producers or livestock producers in general. Many dairymen, and most all row crop farmers, are believed as astute in milking the government subsidies as they are in agriculture production. No, this is not a pleasant conversation to have. I have experienced a contracting industry since 2000 in retail commodity brokerage. I do feel though that as unpleasant as this may be, I'd rather be told how bad it may get and make that decision, than someone telling me everything will be alright. 

  

Lean Hogs:

Hog futures were sharply higher today. The index was higher. Further outbreaks of ASF continue to plague China's hog production. Take this as further evidence that China has a function on going to produce more hogs in a controlled environment that will need a clean feed source. I can not time the needs for the product, but their issue is grave and I believe they will do what is necessary to keep from further pork production being impacted by disease. Summer month hogs are back at contract highs in the mid-$90's. A fence hedge strategy may produce a sale price above the $100.00 level while producing a minimum sale floor dollars above current lean hog index. If you are not under contract, call and I will be glad to go over the specifics of this hedge. 

Corn:

The rally in grain prices has begun to revive interest. With the demand sighted from China, and aspects of no telling what will transpire as inflation has been turned lose, some are beginning to again look at commodities for a hedge against inflation. While investors may flock to ETF's or own the stocks of commodity related companies, livestock producers will need a directly correlated hedge for their feed needs. Discussions in the office brought about the comments on the next couple of years and what may tranpire under the new political environment, as well as world commodity needs and who can afford them. I fully understand how difficult it is to make day in day out decisions. Attempting to long term strategize is even more so. However, a quick look at where corn prices have been in the past, what inflation under the trillions of dollars of stimulus already in circulation is producing and the addition of going to come under this administration, there is no telling where traders could drive the price of feed to.  Remember it is not the US in demand of grain, it is China. We do not know what the Chinese government will pay for feed to grow their hog production to feed their 1.4 billion people. Tonight, look at the 2023 $6.00 December call options at around a dime.  

 

Crude:

Energy prices firmed today. The trend remains well intact. With current prices registering the highest oscillator reading, I look for further upside movement, or if starts down, a wave 4 correction. 

US Treasury Bonds:

Bonds sold off sharply today. The dead cat bounce from the 2/25 low was pretty significant. Today's lower price has given back half of the bounce so far. I anticipate new contract lows as owners flee the high price/low yield instrument for lower priced/higher yielding ones. Verbiage from another Fed president today mimic's the others to the tee. They have stated that inflation is not a concern to the Fed and all available resources will remain in use. I don't know of any other way to take this than the liquidity will continue to flow and those with it will buy what is needed.  

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.