In my opinion, I have hashed out about everything known to us at the moment. Packers made their move to improve profit margins by cutting the slaughter pace in hopes of sustaining current box beef prices. So far, it hasn't helped. Cattle feeders have seemingly backed off a little, but not the farmer/feeder. Of some issue going forward will be a couple of factors dealing with increased supplies. For the fat market, cattle purchased in the past 6-month flurry of activity, will be ready for slaughter March through April. With a belief that a large portion of these animals were purchased and raised by farmer/feeder operations, it will be anticipated they come out heavier, with some under the radar of not having over 1000 head on feed. Therefore, more numbers may be made available than are reportable. Nonetheless, cattle feeders don't appear in any hurry to attempt to make their own margin as packers have. So far, they appear to be overly optimistic on consumer demand with expectations of profit based upon an ever-increasing price for beef and cattle. Until something comes in unknown, it appears packers are attempting to make margin, cattle feeders not, and the consumer believed making contracting moves in discretionary spending.
With the knowledge of derivatives available to you, and how each one will impact your bottom line, your next consideration is, who do you wish to assume your risk and how much of? The current width of positive basis leaves significant price void to be filled, and will be filled. The risk of loss is increased to producers simply due to the premium cash has over futures. There is basis risk as well as directional risk. How to manage the positive basis is a must and knowledge of how to do such is available.
Energy prices were lower at weeks end. I no longer believe energy prices will rise. Gasoline, the energy source for the consumer, is believed the weaker of the complex. Although diesel fuel may soften as well, it is not anticipated by as much as gasoline. Interest rates continue to be high as the entrenched inflation just keeps rolling forward. New home sales were down dramatically, leading to further evidence that the market highs produced from 6 trillion dollars doled out is starting to wear off. With only 5 weeks in office, just the first layer pulled back exposing government spending has been phenomenal. With more expected to come, I can see where great disruptions in government spending could greatly impact our economy.
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
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.
