In my opinion, the increase of volatility, and further price expanse, may have produced a point in which production schemes of paying inflated retail for incoming feeder cattle, with only a discounted wholesale price to market into, have come to a pause. Whether a long pause, or short, the spread between starting feeder and finished fat projected a breakeven for which even the best projected decrease of input costs or increase in consumer demand would be difficult to return investments. Friday's limit down close in feeder cattle will make for an interesting weekend to sit through and an expanded limit of $13.87 on Monday. Any hint of the border reopening, or worse, the screw worm found in the US, could have damning ramifications. Especially with this week's rally emboldening some to say, "there just ain't no top". Note that all profit potential is reliant upon several factors of projected lower feed costs and higher consumer demand, or really just a willingness to pay more. If those projections are not realized, and most cattle placed since June are reliant upon those factors materializing, I am unsure to what extent the damage to unhedged cattle feeders could be. Even hedged, this won't be any picknick due to the basis of fat cattle and premiums paid for feeder cattle. All of the above leads me to expect further strengthening of vertical integration as we may learn sooner than later, whose deep pockets have helped to fund portions of this rally. With recommendations having been made throughout the rally, and none, by anyone, having any merit up to Thursday of this week's close, frustrations will be at a very high level if this is the top and nothing has been done about it. Something to consider would be that were feeder cattle to lose $100.00 in value, they would still be in line with the 2014 peak.
Let that sink in just a minute. This is to let you know that even with a sharply lower opening Monday, there remain tremendous gains to be captured. With the past two weeks of volatility and significant price expanse, the storm warnings have turned into the storm. Those assuming your risk while in the storm will want more premium on options, and be less likely to bid futures to any levels that would reduce their leverage on assuming your risk. The futures trader in live cattle seemingly did a great job in not having producers transfer their risk on to futures. They kept the basis spread just wide enough so were something like today to materialize, they have a great deal of wiggle room. In the feeder cattle pits though, they got a little ahead of themselves with both futures traders and cattle feeders saying there just is no end in sight and pushed futures into an exceptional negative basis in this year's remaining contract months, and January to an even basis. To the backgrounder, and all sectors under, the futures trader has never been a better friend. Now, they just have to stay that way.
Corn was able shrug off the sub $4.00 price this week. While maybe not a reversal, but the amount of farmer selling that was noted this week may produce reserve in further selling. While corn is relatively cheap, it is nowhere near the projected price needed to justify the premium paid on feeder cattle. A sideways corn trade would be believed as damning as if it were to rise in price. Pasture conditions and hay production remain elevated to keep the prospects high for herd rebuilding. Some numbers shown today reflected year to date calculations of approximately 6% fewer cattle slaughtered, but only a 2% decline in beef production. This is a staggering reflection of how good cattle feeders have been able to reduce the impact of lower slaughter numbers. Now, with the possibilities of an increase of inventory, and a belief the beef/dairy cross has grown further, next year may still see tight cattle supplies, but maybe not nearly as tight of beef supplies. Of some concern is the increased percentage of long fed cattle over 150 days. Were this price decline to continue, it may be found that cattle feeders have a few more head they could put on the showlist. If this has any validity to it, the longer they hold out marketing those cattle, the more leverage the packer could gain. A border reopening, or any hint of decline in consumer demand would take all control from the hands of the cattle feeder as their squeeze has been the limited supplies. Neither bonds or energy moved in a manner that led me to think any differently from aspects of current stagflation, still a formidable adversary, with some hints of potential recession were a further divide between Main Street and Wall Street to materialize.
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.
