In my opinion, headline news risk, of further escalation in the middle east, took a great deal of wind out of the bull market this week. Consumer demand is front and center with boxes topping at over $394.00 this week. As well, the impact higher gasoline prices will have on their discretionary spending habits becomes obvious. Gasoline is up 19% since May 30 and diesel 33%. The manipulation of production, in every sector, has been phenomenal. Where it probably stands out the most is in the production of more beef from fewer cattle. Growing cattle to sizes never imagined is taking place routinely. Once cattle have reached the Buffalo size, they tend to either go backwards or worse, begin to die. The significant build in heat coming will be anticipated to stress these larger animals. A combination of nearing an end to the summer beef eating time frames, and a potential need to let a few more go than desired due to the heat, is expected to put further pressure on cattle feeders to keep the current manipulation going without something breaking.
By far the most interesting aspect of all is the risk being assumed by the cattle feeder. At the close on Friday, the spread between the feeder cattle index, and December live cattle, settled at the second widest spread ever to begin the finishing process. I anticipate the spread to widen even further before it comes to an anticipated dramatic ending. How? Simply by the ability of futures to trade lower, and cattle feeders either sustaining current bid on feeder cattle or not reducing them at the speed in which a futures trader can. This would continually widen the spread to the cattle feeder, further increasing risk, or need of cash fats to trade sharply higher. As energy prices influence a number of factors, all out of the control of producers, and cattle feeders continually placing themselves at more risk, a bubble is believed being built in the cattle markets. The flip side of all of this is that if you want to still buy cattle, the future is where to buy them, not today. Discounts in feeder cattle futures into the spring of '26 offer cattle feeders opportunities to buy cattle cheaper, just like the negative basis did for backgrounders to market into at a premium when it was still available. As the positive basis continues to widen, it remains greatly beneficial today, and projected disastrous in the near future.
Feed costs are interesting as well. Corn appears in little jeopardy at the moment, and even with some areas not as good as others, the sheer size alone will help to fade many issues. The line in the sand at around the $4.34 area December corn is expected to hold for the time being as both beans and wheat are making some headway higher. I anticipate beans to continue higher as the support from a mandate increase on bio-diesel is expected to keep edible oils on the forefront of further higher movement in energy prices. The November of '26 beans have my undivided attention, due to this year's short crop, a lot of river bottom acres needing replanted, and a question as to how many bean acres will go in behind wheat. I have been recommending being long November of '26 soybeans. Wheat has come back to life as well. Rains in Kansas have impacted some late-stage growth and harvest. When coupled with China and Russia's wheat crop not stellar, I anticipate wheat to trade higher. Energy will be the key to next week's movement, and not much else. It is energy prices that have been the mover of most commodities the past couple of weeks. Any further escalation in the attacks would be anticipated to create a significant potential for unintended consequences. Any de-escalation and energy could be sharply lower by the end of next week. The current situation appears laden with risks from every angle, and to cattle feeders, with cattle prices at historical highs, the risk appears ominous. Bonds are pretty much flat. After the Fed did nothing this week on rates, and the risks high of an explosion of inflation, bond traders are not seemingly very willing to own US debt. Wrapping up with the on-feed report showing still 11.4 million head on feed. While I have not done the actual math, but it appears the past 33 months have produced the most stable number of cattle on feed in a very long time.
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.
