Live Cattle: Cattle feeders continue to inhale negative margins. Futures traders are gracious in now providing a negative basis, but not gracious enough to reduce the negative margins. The sharply higher feeder cattle price may be due to several reasons. First and foremost is that some cattlemen are in belief that new historical highs in price will be made in 2026. Some of it may be that there are fewer cattle this time of year and someone wanted them. Lastly, it may simply be that there is too much production capacity for the number of animals available. Many have stated that nothing has changed the supply side of inventory with the excessive price movement. I think that is true. If that is the case, then I have stated more than once that there has been too much production and processing capacity, and it still appears true. With the processing sector of the industry having started to contract, and still questions of when the Southern border will reopen, the production side of the industry may have to contract as well, or producers will continue to bid higher, potentially creating worse projected margins, eventually forcing closures. I don't know how to stop this from taking place, or that prices will rise to the levels needed to return input costs. What I do know is that the assumption of risk is significant, and were the previous decline to be only the first move down, few would be able to survive the next sell off without some form of downside protection.
I recommend buying the at the money put options on the February and April contracts. This is a sales solicitation.
Feeder Cattle: Backgrounders are seemingly taking ques from cattle feeders and just paying whatever necessary to own them. Cattle feeders are inhaling risk, so let them have them today, as it is the highest price available. Futures traders are not expected to move to a negative basis. Cattle feeders may want to assume the weight of Atlas, but there appears little interest of the same from futures traders. Cattle feeders are believed in a very poor position when attempting to procure inventory as they are already paying top dollar for some, increasing the index price by $22.10, and have no more basis spread than $14.00 out to May. Basis is worsening with cash moving sharply higher than futures, leaving producers having to make discounted forward sales. This is where the width of basis may have some importance. The narrower the basis is, even positive, the less risk of basis convergence you have to assume.
The wave count has unfolded to a point in which I believe some clarity has formed. I have had to jockey back and forth for the past two weeks as this move has unfolded. With today's new high, I think the C wave of an irregular B wave is nearing an end. On the chart below, note the January contracts wave count. For the time being, I will keep this count and it applies to all contract months. The lesser C wave of the larger B is then dissected on the chart below using a 5 minute time frame, due to the abruptness of the rally. A new high tomorrow is anticipated, but not expected to be by much more than $1.00 to $4.00.
Lastly, this move has been one for the record books and has decisively divided many in the industry. I don't know how much negative margin cattle feeders and lenders can inhale without coughing or throwing up, but I think we are on the verge of finding out. I recommend producers that are loading the wagons for the June and July video sales to buy the at the money August feeder cattle puts. This is a sales solicitation. I recommend sales in the months you will be marketing inventory in as close to expiration as possible, to enter into a fence options spread through buying the at the money put and selling the $10.00 to $25.00 out of the money call. This is a sales solicitation. I recommend that if you have intentions of marketing into this rally, have all your plans laid out for what you want to do prior to the opening tomorrow.
Corn: Grains were lack luster today. After a lower start, selling dried up. All were a tad higher, but the very disappointing news from Bessent and Rollins of having to make bridge payments and hopeful bean sales by February, is not bullish. The increase of South American crop is not bullish and the carry charge and basis for both corn and beans are clearly telling you to keep them on farm, or sell them, but don't store them at the elevator.
Energy: Like several commodities today, energy started off lower and then pushed higher through the day. Not by much, and diesel fuel did make a new low in this decline. So, maybe just a day of marking time before further resumption of the down trend.
Bonds: Bonds were lower on the day and only 5/32's from making a new low from contract high. Japan has significant economic issues that may impact the US. Even without, there is little expectation of a reduction of inflation and the President wants to stimulate.
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
This is intended to be or is in the nature of a solicitation.” Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.
