“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

1/16/2024

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Live Cattle:

The reluctance of futures traders to push premium for cattle feeders to sell into paints an ugly picture.  Not only the loss of fund participation, but most likely, a great deal of producer participation in the futures market.  If fell prey to the cheerleaders, touting at times "Texas Hedges" and "the sky's the limit", it is not difficult to see why.  So, the futures market itself is dealing with an extreme lack of human participation, pretty much reflected by the dollar move, 4 times today.  How the cattle are impacted, or production of, is yet to be determined.  I would think that cattle on feed are the least susceptible to issues due to the concentration of inventory, as well as tight controls of production with feed and water more available.  Hence why I believe fat futures are not performing as well as feeders.  Unfortunately, this issue has widened the spread between feeders and fats, decreasing profit margin that cheaper feed just won't overcome by itself.  Which leads me to the next step. 

Feeder Cattle:

That being, I want you to look at whatever month you are going to market feeder cattle in, consider the basis spread, and if beneficial, you lock it in.  The type of rally I am hoping for, which you know hoping is a disaster already, would be one for which some begin to say, "it ain't comin' back from here".  To me, if traders were to get bullish, and push futures to premiums that are beneficial to you, do not hesitate.  I continue to believe that your profit potential will be made from the basis spreads, more so than a directional trade higher of the cash markets. So, you have some work to do tonight, as I do not know if, when, or by how much a rally may ensue.  At present, the basis may remain somewhat skewed, due to the lack of cash volume.  As the weather breaks, will cattle feeders be anxious to jump out and bid higher for inventory, worsening margins, or be more conservative in hopes that the increase of imports, decrease of exports and the agenda to grow what we have bigger, while continuing to explore blending the beef/dairy cross, will bring the price of feeders down, in an attempt to find margin?  I don't know either.  So, like a dog on point, I recommend you walk up slowly, with the safety on, but ready to pop that safety off and pull the trigger as soon as they flush.  That flush will hopefully produce a rally in the futures that may or may not be realized in the cash markets.  Can you live with the consequences of your marketing decisions?  Were the basis spread all the profit potential that was available, would that be enough to profit from?  If the basis spread widens significantly, can you manage the margin calls?  If futures and cash move significantly higher, can you live with the decision you made earlier to live with the basis spread?  I think these are important questions to ask yourself.  If you cannot answer these, I think you need to spend some time thinking about them. Get your lender involved, you get involved, and together, we will build a relationship to help you, the producer, manage price risk.  

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Hogs:

Even lower today, I am somewhat in awe of the ability of hogs to not have collapsed.  I may be too impatient, or I could be dead wrong, but nothing has suggested that yet. Although the speakers didn't cover livestock, aspects of the economy, and other markets, just don't suggest pork will be in stellar demand going forward.  As well, cheap corn makes cheap cattle, cheap soybean meal can make for cheap hogs, and soybean meal is plummeting. So, I continue to anticipate a significant price decline in June hogs, and with the basis spread at $25.50, I recommend producers fix unpriced hogs with a fence options spread that can solidifying a large portion the basis, while still producing the potential to benefit to a predetermined level if prices do move higher. This is a sales solicitation.   For a packer, I recommend buying the June $88.00 puts out right.  This is a sales solicitation. 

Corn:

Corn doesn't seem to have a friend anywhere.  Beans are losing the few they had as well.  Corn first.  Look at input costs, and consider marketing some new crop corn in this manner. All in the December '24, buy the $4.70 puts at $.34, sell the $4.00 puts at $.07&1/2, and sell the $5.50 calls at $.17&1/2, for a total premium of $.09.  This produces a floor of $4.61.  With crop insurance, any price under $4.00 would then be taken care of by the insurance.  Were corn to explode, you will be selling corn at $5.50.  This is an example with intentions of it being a sales solicitation.  I would ask that you consider this and poke holes in it if you would like.  You are going to have to market corn.  The carry charge says to store it and the carry only goes to pay the storage.  March corn is already trading below December of '24.  I anticipate May corn to trade under the price of March when March goes off the board. 

Energy:

Were it not for the Middle East escapades, I think oil would be dollars lower.  I think if it does not escalate soon, crude will drop dollars.  The build of oil reserves and current production levels suggest the US has plenty of oil.  How, with such a poor energy policy, still baffles me, but the charts below, shown with permission from Erik Norland, economist at the CME group, tells a different story.  So, with this information, and pretty much proven wrong on previous thoughts of higher energy, I anticipate energy prices to drop significantly.  

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Bonds:

Bonds are lower, continuing with the wave $ correction. 

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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.