“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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5/7/2024

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Live Cattle:

Fat cattle futures are attempting to converge basis.  I think they may get a little closer, but I don't expect fat cattle prices to soar much more.  Why?  Because the industry is rationing beef.  The industry understands that were cattle/beef prices to soar higher, it could destroy the capability to expand, as well as, crush beef demand, due to an unaffordable price for beef.  Don't forget the agenda and goal to reach.  The goal is to keep beef production at levels that will hold consumer demand, but potentially allow for less price fluctuation in the cattle markets.  The agenda to accomplish such has been the increasing weights per steer, increasing imports, decreasing exports, and furthering the dairy/beef cross.  I see nothing to change the agenda as I am not seeing the packer increase slaughter rates, that would increase beef production, that would put more product on the market, that may drive the price of beef lower. Instead, they have kept the slaughter pace as is, producing less beef, therefore, keeping retail beef prices higher to the consumer.  Outside market forces appear to continue to weaken while bonds are strengthening.  The once transitory inflation, that moved to accelerated, has now stagnated. 

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Feeder Cattle:

Feeder cattle prices are too high, and the cattle feeder says so.  With only the cattle feeder in need of an 850# steer, and there being no computer generated trading to influence their decision, it seems with the lower trade, the cattle feeder is saying they are not going to pay this high a price any longer.  Reasons of running out of cattle are thinning as the agenda as a whole has now stopped the reduction in beef production to a stable level with last year.  No doubt, it could go negative again, but with the above stated on fat cattle, there would need to be something new to drive consumers towards a greater spending tendency. The most interesting aspect is the feeder cattle index. It is offering clues via the Elliott Wave Theory that will produce some definitive price points for which change would be expected.  At present, the most recent change has been the exceeding of the most recent $241.07 low.  Exceeding this low creates the appearance of a wave 1 & 2 complete and wave 3 in progress.  A trade of the index back above $247.18 will void the current wave count.  Until then, I expect a wave 3 target to $230.00 via the CME feeder cattle index.  A wave 4 correction may be seen during the summer sale time frame, but after that, I would expect a wave 5 to take feeder prices towards the December '23 low around $215.00.  

From May 1 to today, the basis has widened by $10.46 negatively.  This is money in your pocket for inventory to be marketed in October.  In just 5 trading days, futures traders said, "here is $10.00 more than what cattle feeders are willing to pay today."  Don't want that?  How about widening it even further to over $20.00.  Even though the futures traders are significantly less willing to provide you with excessive premium to market into, you can still achieve a maximum sale price higher than the historical high of the index with an options position.  At the price of October at $256.10, you can buy the $256.00 put and sell the $266.00 call for a premium of approximately $4.45.  This produces a minimum sale price of $251.55, $2.55 under the current all time historical high of the index and $11.50 above Monday's index reading.  It places your maximum sale price at $261.55, $7.45 higher than the index high and $21.50 higher than Monday's index reading.  So, here is a strategy that I believe will benefit you in your marketing.  Your risk now shifts from not losing money to just not maybe making as much were prices to move to new all time historical highs. I present to you the water trough.    

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Hogs:

Hogs are in convergence of basis.  The extraordinary 10 minute move this morning most likely was a computer generated "pull the offer" type move that sends buy market orders in search for an offer placed by a human with intentions to be filled.   

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Corn:  

Like the feeder cattle, here is the trough.  I can't make you drink from it, but the market offering a full tank of fresh prices that haven't been seen scene in 6 months.  I have no idea where the next trough will be, or whether the horse will just turn around.  What I do know is that I can fix prices within a parameter to market into.  Your only issue will be whether or not you can live with the consequences of your decisions.  The hedge is to make those consequences easier to live with than having done nothing at all. I expect this short term weather issue to subside with few problems.  Actually, if you think about it, all the millions of acres that didn't get flooded have received exceptional rain fall and replanting in the US has never, ever, been a problem.  Both farmers and livestock producers should pay close attention as these may be the highs for the year, but prices may not fall to levels for which some of the premium paid for feeder cattle was based on. I think the stagflation could play a role in this situation for which may not be directly noticeable. 

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Energy:

Crude and diesel fuel attempted to hold their own today, but gasoline slipped lower.  Energy is what drives the US and it is moving lower, leading me to expect further softening of the economy.  The first quarter bout of inflation has leaked into the second quarter.  The third quarter will be a doozey due to nearly half the year in a rising inflationary environment and the third just before elections.  So, no telling what may happen in the third quarter, but already Bloomin' Brands fell in the first quarter as revenue fell 4%.  While Outback was only down 1.2%, the Bonefish Grill, a more upscale restaurant fell by 4.9%.  Although it did mention a slight decline in food prices, labor and operating costs increased.  Both probably due to government interaction.  

Bonds:

Bonds are higher.  Bonds are expected to move higher, because the stagnating inflation is hampering those who work and benefiting those who don't with more government spending on them. 

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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.