In my opinion, there was significant information provided this week that is anticipated to take a little time to digest what impacts they may or may not have on the cattle market. First was the revision of the employment report. I can't disagree that beef demand has been good, even without the nearly 1 million employed that we thought were employed. Recall though that supplies are dramatically shorter as well. Taking to heart the two-tiered economy suggests that the demand came from a lot fewer consumers willing to pay a higher price or consume more. Therefore, were anything to ding the spending spree of those few, beef would be anticipated to soften abruptly. Next was the President making comments on beef. When quizzed on why beef prices were so high, he stated that when policies kicked in, they would come down. I remain confused whether the screwworm is a policy. If not, and the border reopens due to a policy kicking in, then the screwworm may not have been the reason for the border closed to begin with. Another is believed a realization that input costs are not going down, even with abundant feed and feed stuffs.
Bond prices have been sharply higher this week, but little to no change in retail rates. Energy has remained stout this week and transportation costs are not decreasing either. By weeks end, corn was sharply higher as well. Most of the expectations for justifying paying whatever necessary to procure inventory have not materialized, or found misleading. Having procured inventory in the past 3 months has been a very costly endeavor. So much so, that margins for a lot have been squeezed to practically nothing, while placing cattle in feed yards continues with starting negative margins. Now that futures traders are abandoning assumption of your risk at a narrower basis spread, producers will inevitably assume more of the risk of price fluctuation. With the basis severely positive, the risk is twofold. Producers are at risk the basis spread, as well as potential adverse price fluctuation. While there is nothing out of the ordinary about a commodity market squeeze, this one is expected to have changed the cattle industry significantly in moving towards greater vertical integration.
I anticipate a retracement in price for fats and feeders back to the July 2 low per respective contract month. There were 3 factors that materialized from this low. One, the oscillator had traded below the zero line in fats, suggesting the last rally was complete and a correction intact. Upon completion of what is believed a wave 4 low on July 2nd, the angle of ascent increased, as well as did open interest. So, these three factors are believed to represent the, or a, 5th wave. From an Elliott Wave stand point, upon completion of a 5th wave, the next most probable move is back to the wave 4 of the same magnitude. In this case, the July 2nd low is believed the wave 4 level for prices to return to. As of Friday's close, that suggests there is still about $40.00 or more to move lower. The increase of input costs, and price of option premiums, due to value of the contract, suggests there is very little room for error. All of the above has nothing to do with an increase in supply. With all of the supply factors believed a moot point, until the border is open or tariffs lowered, demand from consumers and industry participants are expected to be the only market driver. More cattle or beef inventory would shift this narrative to starkly bearish.
Christopher B. Swift is 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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