Live Cattle: Cattle feeders are expected to shift under some fundamental changes. One, I anticipate fats to be marketed more aggressively due to heat and potential slowing of consumer demand. Second, I anticipate them to stop paying higher for feeder cattle prices. Whether they adhere to either of the fundamentals is questionable, but without a doubt needs to be done.
Fat futures remain woefully underpriced to today's cash level, and price paid for incoming inventory. The reliance upon an ever increasing price is wearing thin on those financing your production scheme. Futures traders are not expecting the same consumer resilience to higher prices as cattlemen are. Hence why the basis is so positive and not expected to narrow with futures higher. Traders already have a 10% to 15% decline in fat cattle prices from cash levels already factored in. This leads me to believe that fat cattle futures may soften further, but may have already factored in a portion of what may come.
Feeder Cattle: Futures traders are anticipated to widen the basis significantly as cattle feeders, paying current prices for incoming inventory, entails risks that few can absorb alone. Hence, if needing a lender, expect scrutiny at a very high level on your production scheme.
I believe the top has been made in cash and futures. I believe that futures are going to break hard to the downside. I recommend you have 100% coverage on all newly acquired inventory to be marketed to November. This is a sales solicitation. For those marketing into next year, the discounts are significant and you are paying tip top price today for that incoming inventory. The change in basis from negative to positive, and now reverting from an inverted carry to potentially carry, are fundamental changes in futures pricing that indicate reluctance to assume your risk at a premium. It no longer matters whether you think prices will continue higher or not, at the moment, the market is simply telling you it has no intentions of offering to assume your risk at a premium. Not only has the cattle feeder assumed so much risk, now they are going to have to assume even more on their own.
Corn: All were lower to sharply lower, again. Corn appears as a drag on corn and wheat. Breaking through the line in the sand and what appears to be improving crop conditions, could have corn farmers making some abrupt sales. The fundamental spread appears to be long beans and short corn. Whether that spread would make money or not is a different question, simply due to beans greater propensity to trade in wider price ranges than corn. Wheat has taken the brunt of the blow. Down over $.40 from last Friday's high is a sharp price move, even for wheat. As I believe a great deal of both up and down trading have been exaggerated by the energy complex, a couple of days to go by and things may look a little different. If worse, I would think corn would be the instigator of.
Energy: A huge amount of risk continues to be unwound as the fundamentals that caused the significant increase appears to have mitigated some. For the moment, I am still friendly oil, but do not recommend topping off farm tanks, as I do not know what premiums providers have attached, due to the recent volatility. Of issue is that the inflation sparked by energy could backfire. Prior to the spark of inflation, recession was on the mind of many. President Trump has begged for lower rates to keep a small amount of the inflation going, as to not turn backwards into recession. However, with the large run up in price, and now potentially some cooling off to take place, oil could drift lower and the US could well go into a recession. Note that there were potential decisions that had to be made on securing energy needs when at the more elevated levels. If some of those needs were cemented, then the margins on whatever is being produced, narrowed.
Bonds: Bonds were a little higher on the day. I do not have a good feel for the next most probable move in bonds. If anything, with stagflation appearing as the more likely scenario though the second half of the year, sideways may be the next most probable move.
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
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