Live Cattle: The meat protein industries are falling in line with one another. An article read this morning suggested a need to expand in broiler production has been met with opposition. Even with estimated larger feed grain carryout's this year, producers remain reluctant to do so. The reason being, the inflation has caused production costs to soar in the future, hampering current profit margins. So, like what is being done in cattle and hogs, the poultry industry appears to be growing them bigger as well. The manipulation that is having to take place to remain profitable is not believed sustainable. Box prices continue to elevate, and retailer's, whether restaurant or grocer, are passing these costs along. With 1st quarter GDP having been less than expected, jobless claims elevated, and still elevated consumer price index, consumer demand has to remain elevated.
Risk remains elevated to cattle feeders, believed purchasing feeder cattle based upon today's cash fat cattle price. Today was no exception as the spreads between starting feeder and finished fat began widening again. The concept of "have to" is a difficult one. Unfortunately, the price paid today for feeder cattle suggests exactly that, the price of fat cattle "have to" at least be sustained, if not "have to" move higher to reflect a profit. Rationing is believed having moved from 101 to a Masters class, with only a Doctorate left. With few signs or signals of any voluntary contraction in production capacity, involuntary is expected to be ugly.
Feeder Cattle: While hard to prove, but I would say that there was as much short covering in today's price action as there was a desire to be long. Regardless, futures traders provided a friendly environment for which to manage risk. As basis continues to swap back and forth around even, all eyes remain on the cattle feeder. With open interest rising in both fats and feeders, there is no doubt a great deal of interest is seen in the cattle market. Today's profit margins appear phenomenal in comparison to placing new inventory. As above, the rationing is elevating, leading me to expect significant volatility, further price expanse, and no telling what forms of manipulation from those seeking to regain margins.
Lenders are believed in a precarious position with so much working capital at stake wrapped up in a leather bag. Were they to begin showing reservations, or demanding greater security, know that there is a security agreement called "an assignment of futures contracts", that give lenders 3rd party access to your commodity account. Knowing you are using risk management protocol in your operation may or may not provide lenders with the additional security they may seek. As the current excess of working capital needed grows, the situation becomes a double edged sword. On one side, the lenders themselves are at an extreme risk of your production capabilities. On the other, lending money is what they do and any way they can help to secure a return on their investment is believed wise at this point.
As the cattle market has yet to reach the limits of elasticity, and no voluntary contraction of too much production and processing capacity, everyone involved will be managing more risk, regardless of price direction.
Corn: Beans were able to claw back a portion of this morning's losses. Corn was soft and wheat a tad firm. Corn is believed testing lows with beans believed going to trade higher.
Energy: Energy was lower today after the GDP showed the economy wasn't as strong as expected in the 1st quarter. Energy prices have been sideways for enough time that a breakout, in one direction or the other, should be anticipated. I anticipate to the upside.
Bonds: Bonds were higher today, believed due to the weaker than expected GDP. Bonds were able to make a new high from contract low in this session. A trade of September bonds above 113'20 would have it up against the downward trending 34 day moving average. I will be looking to see if that may be a place to sell bonds.
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.
