Written by Chris Winward... Commodity broker & consultant with Swift Trading Co.
Live Cattle: Live cattle futures finished today's trade with the August contract down 25 cents at 223.65 which is over $13 under last week's average cash prices. The seasonal tendency for boxes is to move lower and yesterday's $4.87 decline set up today's trade to have a slightly negative undertone throuh most of the session. Today's AM print was down another 48 cents. A lower box trade is normal after the 4th of July and was to be expected. This week's cash trade has yet to fully develop but is called to be steady to higher and without a futures break tomorrow, I believe they will get it. Some early trade developed in the week in KS and TX/OK/NM at $230 on light volume. Tariff threats against Brazil beef would be supportive to the live cattle complex if realized. This morning's export numbers were weaker than last week's print with Japan, Mexico and Hong Kong being the bigest buyers.
If boxes continue to trend lower, it begs the question of how long packers keep paying up for cash? That is yet to be determined but it will take more than a $15 break in boxes to turn the cash market. We can debate all day the health of the US consumer and how over leveraged they are but they have not replaced beef with chicken or pork yet. Many believe that the arrival of screwworm to the US is inevitable at this point and brings up the question as to what that would do to US demand. The initial shock of the false headline from a radio station in Missouri last month was a good indicator as to what the next one would look like on the futures board. Obviously we hope that it would not happen as it would deliver a catastrophic blow to the cattle industry.
Feeder Cattle: After spending most of the day in the red, feeders closed today's session mixed with back months up and front months down. The August contract is trading above the index by $3 and with 42 days left until Aug expiry, a lot can happen before the two converge. The border closure remains a supportive factor with no sign of resolution in the near term although steps for risk mitigation are being taken by both the US and Mexico. I believe considering hedges is important at this juncture as even a 15% break in the futures from a border reopening or broader market correction could dissolve what are now considered good profit margins for many producers. I advise readers to get with your risk manager and go over the parameters of at the money bear put spreads. This is buying an at the money put and selling a lower strike of the same month. I prefer this approach in the current environment because it doesnt cap the top side and can be adjusted later on a move higher. Contact me if you have questions. This is a trade recommendation. Feeder futures have been trading rotations this entire move higher and chart action over the past couple sessions looks like we could be starting the next rotation. Long term trend support for the August contract is $20 below today's close.
Corn: This morning's corn export numbers were a marketing year low and with a favorable US growing conditions thus far, any rally attempts for corn futures have been capped. Some drought concerns for the midwest during the month of August are starting to surface and there is little weather premium priced into futures at the moment. That being said, the news is mostly bearish this week and corn is responding. The $4 level for sep corn is worth considering for feeding coverage via bull call spreads for cattle feeding. This is a trade recommendation.
Christopher B. Swift is a commodity broker and consultant with Swift Trading Company in Nashville, TN. Mr. Swift authors the daily commentaries "Mid Day Cattle Comment" and "Shootin' the Bull" commentary found on his website @ www.shootinthebull.com
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 their 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.
