The Cattle Range Home Page
November 10, 2017
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."Shootin' the Bull" Weekly Analysis

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"Shootin' the Bull" Weekly Analysis

In my opinion, it has been perceived for several weeks now that the rising futures markets were influencing the cash trade.  This week, the packer pulled the rug out from underneath the futures market by trading on Tuesday and at a dollar lower.  This evaporated any influence the futures may have produced through the remainder of the week and the extent of being caught off guard brought December futures down $4.60 from Tuesday's close.  Add the $3.00 that came off the top just prior, and the move down has been a little over $7.00.  Interesting that the impact was muted on all the back months until Thursday and Friday.  From the information gathered this week concerning further distribution channels formed through Chinese retail giant JD.com and the Montana Stock Growers Association, it appears the markets are drawing dividing lines.  Those lines are between front end elevated inventory and now the loss of momentum, and the back end believing demand will remain, and potentially elevate at a time when inventory could be strained. The futures markets began reflecting this when the 1.2 billion dollar deal was struck this week. 

The spreads have actively worked in a bear fashion as front months traded lower the most.  It has worked with fats and feeder spreads as well.  Those have been stronger feeder prices against weaker fat prices.  This factor is anticipated to stay with us for some time.  While the front end will have to deal with the holidays, beyond the first of the year, I would anticipate fat prices to sustain the current elevated price with advancements as supply & demand factors unfold.  The loss of momentum helped to clarify the wave count as well.  It didn't change anything on the major wave count that remains in a major wave 3.  What makes it really tough though is the separation between contract months.  Variances within fat cattle months makes the intermediate and minor wave counts differ.  Believing demand will continue leads me to stay with the more friendly wave count in the back months and stick with the same strategy.  That being, if you need to market inventory, then do so.  However, do not be short the market just for the sake of being short.  
 
Two years ago, the US came out of quantitative easing and began raising interest rates.  All but a few commodities bottomed early in 2016 and made some type of move off the bottom.  By early 2017, the only markets that persistently remained low have been wheat and corn.  The healing of the economy increased disposable income and therefore spurred greater discretionary spending. Today, we see energy prices at new highs for the year, metals and meats at elevated prices and even soybeans elevated from previous lows.  The increase in demand is perceived to have begun to slow the price decline due to gluts.  

Two weeks ago, the ECB began reversing their quantitative easing actions.  Potentially this signals a healing time frame in Europe.  Were Europeans to begin enjoying an increase in disposable income, and therefore increase discretionary spending, commodity prices in 2018 could move another tier higher on the price scale.  I am unsure why so many are anticipating an economic down turn in the US with only approximately only 18 months of improved economic environment.  It could improve for years.  So, don't be so quick to think that commodity prices will move lower when the European continent is just now righting its ship out of the negative interest rate spiral.  Also, I would be careful attempting to equate the stock markets value to economic performance.  Yes, it does provide some sense of security to see ones investment or retirement portfolio at the top, but economic vitality is not always accompanied by a roaring stock market. 
 
Feeder cattle are anticipated to have the most to gain.  While this year has been a fat cattle cash led rally, that may switch some with the current events.  Fats may struggle just a little while longer to get through the current glut.  However, going forward, the likelihood of having significant increases of inventory in 2018 is diminishing.  As hard of a pull as demand has had, I can see where some holes may begin to appear where there just aren't quite as many at a specific weight range as once thought.  Remember two that with exports, the inventory will have to be sewn up quicker as exports are different than domestic trade.  A truck or train can be delayed or rerouted to meet a demand, even if a day or two late.  However, when the ship leaves on a specific date at a specific time, there is no room for error.  

All year long more development has taken place towards creating infrastructure to move US beef across the sea. These lines of distribution are costly and not created for a one time ordeal.  So, while many are focused on the present, and some supply burden potential, I recommend focusing on sourcing your inventory for next year and conduct business as usual. Feed yards are urged to be taking advantage of this weeks price decline.  It hasn't been much, but would potentially make buying calls a little easier with the tail winds.  Recall the intermediate wave 3 target is at $172.00 and were major wave 3 projections to be met above $190.00, call options would help mitigate the price advance.  The positive basis will help to as there remains an approximate $3.00 to $4.00 positive basis to the spring months. 
 
Lastly, the grains got pummeled again as USDA just keeps increasing yield.  The good part of this is that the extent for which they raised the last yield on corn suggests they may not be able to raise it any more.  Therefore, we know what the crop size is now and the work to chew through it begins.  That may not be as difficult with increases seen in energy usage and livestock feed.  I'd like to thank Marlin Bohling, John Jenkins and RFD-TV for inviting me to comment on Monday morning's Ag Day show.  This has been a great experience and the folks there are sincere in providing quality information.

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Christopher B. Swift is a 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.

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