In my opinion, Wow! What a second week in a row of incredible price discovery. Feelings have been hurt, pride damaged, death grips loosened, and the sun shining on a different dog's a** this week, has allowed everyone some advantage to increase future marketing's at the first of the week, at still a negative basis, or potentially procure future inventory, at a discount, by the end of the week in a now positive basis. . The President has kept his word to work towards lowering the cost of beef to the consumer and now potentially, could open the southern border for US cattle feeders in Texas, New Mexico, and Arizona to have more cattle inventory to work with. The hornet's nest that has been hit by a bowling ball has scattered opinions throughout social media that ranges from pure hate to elation that something is being done to help cattlemen and consumers. With still no beef on shore and no cattle crossing, this week's headline news shook the market extensively, but most likely didn't do much physically. The physical part will take place over time, to actually move inventory and or cattle from point A to point B. More likely than not, the largest shift came in sentiment or psychology of the market. How could cattle feeders continue at last week's rate of inhaling negative margin risk without some expectation of adversity? It just happened to come all at once, but I will have to say that futures traders have been more than willing to assume your risk at premiums up until Thursday, with still most prices of fats and feeders back to the range they most recently broke out from to the top side. Lastly, this week's information most likely just broke the stranglehold bulls had on the market. Whether a fundamental shift or not is yet to be seen until actual beef hits the shore, or cattle come across the border. Hence, expect tremendous volatility next week as traders and producers sort out what can actually be done.
Traders are believed in the process of creating a text book Head & Shoulders pattern on most of the spring month feeder cattle contracts. Using the March for example, a trade to the September 17 low would be expected as the right side neck line. At Friday's low, that is about $15.00 lower. The next most probable move would then be the formation of the right shoulder that may take several weeks to form. The left side of the shoulder took 32 days to form and make the head, so if in the same time frame, it may be well into December before the completion of. Then, like what we saw in 2015, the price of cattle would be expected to decline sharply, back to the September of '24 low, the last low before this 5th wave of the bull run. Visuals can be found on our website. Markets have a tendency to return to previous levels of congestion after completing a move. The first move down will be expected to stop somewhere within, or at the bottom of the September 17 low before forming the right shoulder. The second move down would be the one to potentially avoid a return back to the September of '24 lows. I believe that if I am correct on this analysis, producers will be able to use this to help identify time frames to market or procure inventory. If I am half way right, I would still anticipate improved marketing or procurements. If I am wrong, and new highs are made, I am unsure when and which production and processing facilities will be shut down.
Of the most important factor to take away from this week is that it is not too late to do anything about it. Fat futures are just slightly at the bottom end of the September trading range. At that time, it was thought those prices could well be the highs. So, while potentially having missed out on "the" high price, to date, the price at Friday's close is nothing to sneeze at if the President's actions continue to improve beef and cattle production. Basis is very important to watch for now as it has gone negative. This will expose cattle feeders to both directional price risk, as well as basis risk. The digging of the tiger trap, a deep negative basis, was done extensively by traders this week in the feeder cattle market as well as cattle feeders showing reserve in bids. Last week's inhalation of negative margins is believed as much of the break lower in the spreads between starting feeder and finished fat than anything else. Cattle feeders were believed not only jeopardizing themselves, but most likely all those involved in their business practice as well. Specifically, lenders. I recommend you use this weekend to see what remains unhedged and attempt to use the anticipated pattern of a Head & Shoulders to help you identify price levels to make your marketing and procurement decisions. I urge extreme caution due to the width of basis in the feeder cattle market. It can widen significantly more than at present, or could as easily snap back to positive as it did three weeks ago.
Energy has been exceptionally volatile with the fledgling down trend having been broken in the diesel fuel and tested in the crude and gasoline. The President's sanctions on Russian oil this week is believed to have caused a great deal of short covering in the market, rather than buying to be long. I don't anticipate this to be a fundamental change; therefore, I am still somewhat negative on energy prices. Grains were able to drift slightly higher, but not by much as they too are hinged upon decisions of the President. I continue to like being long corn and recommended this week to own July corn with a sell stop at $4.40 and continue owning the $12.00 November '26 soybean calls. These were sales solicitations. I think a China deal would lift beans and corn, giving longs a chance to profit and farmers a chance to sell. Maybe not by much, but like the cattle, enough to break the current stalemate. The President is catching a great deal of flak from all sides. A comment he made, for which is not exact, but went something like this when asked if he thought he was a King. As best I recall, he said, No, I am not a King, I am the hardest working President the US has ever had. I have to agree that when you are working hard, you are going to be subjected to unintended consequences. Sometimes good and sometimes bad, but when viewing other administrations, where not much happened at all, I'll take the hard worker and consequences of over the "handout" guy's and their consequences any day.
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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