“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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4/19/2024

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Live Cattle:

In my opinion, the triangular formation continues to unfold.  The fundamentals to increase beef production are believed well in place now with evidence being sharply lower in our beef cattle herd, yet only down 3.2% year over year in beef production.  I am fully aware of the other side of the argument being, "but wait until the expansion starts".  Well, expansion has been planned on for over a year now with this summer being the most likely time to make those decisions.  Recall a couple of months ago, I stated that a lateral move in production would be more likely than expanding or liquidating further.  That appears the case as multiple disbursement sales have been made, and many continue to tout they are expanding.  These two factors appear to be creating the lateral move.  I continue to believe expansion won't take place for a couple more years and by that time, the alternative beef production factors will be cemented into US beef consumption.  Why won't expansion take place?  Two reasons.  One, the continual limitations placed on production will make everything, in every sector, more expensive.  If carbon credit, you will have to raise fewer cattle on more land, own more land not in production, or buy those credits. If it is water, then there is no telling what may come from that.  The second will be money, the cost of, and the Fed's ability to control inflation.  Expanding in this inflationary time frame suggests in order to profit, the inflation needs to continue. If a deflationary time frame materializes, then everything bought during the inflation will be worth less. Lastly, I think the next couple of years will help to produce a much more efficient line of production as those who do not manage risk, or input costs, will most likely fall to the wayside, while those who are committed cattle producers will grow as the others subside.  One other instance on the cost of money, with the cost being so high, it suggests that return on capital should be explored.  As in, the less than a hundred dollar per head return on an over $2,000.00 investment, suggests a very low return on capital.  Especially for the work and risk required.  The 5% return on investment capital raising cattle can be equaled if placed on deposit with little to no risk, and no work. So, consider that while cattle prices are so high. 

Today's on feed number is interesting with 11.82 million head on feed, approximately 1 % more when March of '23 had 11.64. Today's price of April futures is $181.47 and last year, with fewer cattle on feed was $175.42.  That is a pretty distinct difference in price with more numbers.  Feeder cattle futures have made the most interesting move of all.  While the collapse of open interest in the fat market suggests no interest in the market, the slamming shut of the basis in feeder cattle has caused a great deal of price fluctuation to work with.  This convergence has closed a few doors to the backgrounders marketing feeder cattle, but opened a great deal more for those procuring them.  Basis breathes in and out and produces opportunities when diverging, as well as when converging.  The favor now falls to the cattle feeder where he can buy cattle in the near-term at the same levels of cash today as futures, or at a minimum, a significantly narrower basis in comparison to just three weeks ago to the August and out months.  With the most recent price action, both buyers and sellers are seemingly a little more equal in prices traded. Before, the advantage was firmly to the backgrounder as futures traders provided them with immense premiums to market into that have never been traded.  I think you should read that last sentence again so you may be more prepared were a like marketing opportunity were to be presented. 

Grains and oilseeds are resuming their bear markets.  There are seemingly so many actions that can be taken to stave off a lower price, and even allow for upside potential, were it to materialize, and no one seems to care.  Farmers are not selling and futures traders are.  Small rallies are believed opportunities to execute strategies that will help to market grain at a higher price if realized, as well as lock in a specific price if continues lower.  I expect grains and oilseeds to continue lower.  

For me, this week provided a reversal that is believed to have significant impact going forward.  That being, the diesel fuel market having reversed from an inverted carry to a carry charge market.  This suggests that no longer is someone willing to pay more today, than in the future.  Although gasoline and crude oil remain in an inverted carry market, they are not expected to for much longer.  My belief is that diesel fuel is the energy source of manufacturing and transportation.  It is weak and weakening further as evidence of the reversal in carry suggests.   This leads me to believe that gasoline, the energy source of the consumer, has not only led the energy complex higher, but with a consumer believed spending money they don't have.  If the first quarter bout of inflation, coupled with the Fed's determination to quell inflation, begins to have the intended impact, it would lead me to expect a collapse in energy prices.  Know that I understand I am making these comments with full knowledge of Thursday night/Friday morning missile display.  Nonetheless, the change in carry of diesel fuel, exceptional bout of inflation, and the Fed trying to quell inflation, leads me to be expecting lower inflationary numbers with the CPI, PPI, and retail sales data for this month, when becomes available next month.  The bond market continues to be soft, reflecting this current bout of inflation.  As higher prices are the cure for high prices, I expect some results from sooner than later.  Hence, if or when the economic numbers begin to show weakness, or even the expectation of, the bond market will be anticipated to rally sharply. 

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.