In my opinion, this week saw further jaw dropping price moves on literally no news at all. I wrote this week how abnormal a multitude of the events that transpired over the past 4 years have been, with significant exaggeration of over the past 12 months. Long stretches of drought are what most analysts think is the cause for the low herd size. I think more has to do with the excessive printing of money during the same time frame that encouraged sales equally to drought. Nonetheless, both of these have been historical events that have created significant abnormalities within the cattle industry. With the past 12 months having thrown into the scalding pot the border closures and crippling tariffs on beef imports, it led to a rally for which cattle feeders inhaled negative margins, with some now believed having overextended themselves. All of these factors lead me to anticipate the return to some form of normalcy in production practices, as well as expansion of the herd. This may also include the reopening of the border and lower tariffs on imported beef. The sharp break lower in futures the past three weeks is believed in expectation of the abnormalities having run their course and a new course set to return to whatever normalcy may look like in the future. Traders have produced a wide basis spread to have to contend with now. This factor exposes producers to not only directional price risk, but the basis risk as well. Near the close on Friday, the index reading was $345.96 and as I write this, November futures at $324.50, leaves a positive basis of $21.46. Futures will converge with cash on the 20th. This suggests either cash drops $21.46, futures rally $21.46, or they meet in the middle, at any given price level. The risk of basis is, a backgrounder sells the November contract at $324.50 and the index does not go down, the futures will rise to the level of the index, causing the backgrounder to lose $21.46 on the futures position and gain nothing further in cash. Vice versa, a November future is sold and it does not go any lower, but the cash market drops $21.46 for which you lose the cash value, even though you may not have lost anything in the futures. This is the basis risk. Having written extensively on this matter when basis was even, and for a short period of time negative, it was difficult to foresee this advantage at the time, but now, one can clearly see the advantages and disadvantages of basis, even if not at the highest or lowest price of commodity. I recommend you use this past year as a great example of how and when to use the basis spreads in the future, as volatility and price expanse are inherent in commodity production.
With a great deal of sorting out to have to be done in cattle, the next thing to watch for is feed costs to attempt to climb a wall of worry. Cattle feeders have had their plate full in trading exceptional price ranges of cattle. As those price ranges are anticipated to subside, and profit potential maybe not as dependent upon an ever-increasing price, input costs are anticipated to be an issue to contend with going forward. Recall the statements made about the highest price for December of '25 corn was made in 2022? I think it as possible that the current price for December 2027 corn may be the lowest available today. Long term ventures into commodity trends are different than equities. Extreme leverage of futures contracts produces enormous need for capital that may or may not be readily available. With most equities, 50% is about as much as a stock can be margined with the bulk paid for at full share price. Hence, little or no additional working capital may be needed to meet margin calls. Nonetheless, with a belief that great work has been accomplished to further strengthen supply chains, and a greater propensity to move towards normality than remain abnormal, the next step will be to manage input costs. Reliance upon an ever-increasing price is believed gone for this cycle. Not to say rallies of significance won't materialize, but doubtful another run like this year anytime soon. So, producers will have to find a way to replace wide profit margin swings, and that is believed going to be a twofold job. One, to simply manage input costs, and second to position oneself to manage more inventory. The next several years are expected to be a grueling attempt at expansion. The anticipated shift in border and tariff issues is expected to increase the volume of inventory to work with, and potentially give cow/calf operations some incentive to hold back the heifer and grow more cattle, due to a loss of wide profit margins.
Without government reports, reliance upon private sector information is about all there is. Most of the data I have seen continues to point more towards recession than inflation, with a nagging stagflation that just won't go away. Were cattle to move sharply lower again, I would anticipate it to be from loss of consumer demand than anything to do with cattle. Energy prices were very strong in the products, but weak in the crude. Seemingly, the Ukraine targeted Russian refineries this week. The loss of refining capabilities produces stock piles of uncracked crude and shortages of the product. As the Russian war machine runs off diesel fuel, that seemingly is what caused it to lead the way higher. I think were this situation to moderate, all of the energy complex would decline sharply. I say that due to statistics obtained this week that suggest consumer debt has increased, and delinquencies of, significantly. Bonds remained soft on the week. The President's desire for economic stimulation is obvious. There has been so much money printed and so much debt incurred the past 4 years that sustaining such appears difficult, to say the least. Similar to the 2008 financial crisis, it appeared obvious what was about to transpire, but until the majority saw the same thing, those early had to suffer. It appears obvious that this rate of growth can't be sustained without the printing of more money, or somehow to live within our means. Since the latter isn't going to happen, and the US crossed into another Trillion dollars of debt this week, what's another few Trillion here or there? To me, this feels like heading towards a point of no return. If you let off the gas now, you are sure to not make the jump. If you have too much speed, you could miss the mark and crash.
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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