Live Cattle: It will take the week to see what kind of swapping of horses took place last Friday. The open interest plummeted by over 17,000 contracts and it was no roll. No contract month picked up a fraction of what was lost in the August contract. My opinion alone is that the shorts were squeezed to their limits and the only way to pocket gains from the price advance was to sell. Barring one of the few black swan events, I believe this is one of the largest exodus of existing longs and existing shorts I have ever seen. Although I commented often on the amount of capital it would take to participate in today's price action, I had no clue it would be to this extent. Greater market share has been sought and believed acquired through deep pocket investors, able to pay more for feeder cattle than someone else in a time frame of starting in negative margins and a positive basis. Both are backwards to what most production schemes start with.
Fat futures are believed to have topped, again. This time for maybe a little longer than previously. With evidence of employment not having been nearly as strong as previously reported, and now some aspects that energy is losing steam, recession fears are believed equal to further stagflation or inflation. Bonds moving higher and energy lower is an aspect of recession. Do not forget that the reason President Trump wants lower rates is due to fear of a recession, for which lowering rates is acknowledgement of there being a problem.
Feeder Cattle: Thursdays trading range has created an exceptionally wide stance when attempting to decipher the next most probable move. A new high will suggest cattle feeders have yet to acquire the inventory desired to garner the market share desired. A new low will suggest that some have, or are no longer able to compete in current environment. Barring the reopening of the border, I expect it to take this entire week to see what cattle feeders are willing to do next. The term "deep pockets" has been used over the past couple of weeks. Today, it appears "bullet proof" will be the terminology of the week. So far, all we have to work with is an initial down move followed by a correction. Until a new contract high is made, I expect marketing taking place between last Thursday's high and last Friday's low to be some of the highest marketing's for the year, and potentially into the 1st quarter of next. Volume is exceptionally thin with wide spreads between trades. The volatility will increase option premiums. Although volatile price action can tend to lead to rash decisions, attempt to lay off what is needed when prices are plus and do less when they are negative. Backgrounders continue to enjoy a plethora of derivatives available that range from premium to only slight discounts into the future for which to manage risk with. Cattle feeders and futures traders have been the best friends of backgrounders, and all sectors under for all of this year. Barring a few shallow "tiger traps" laid in the feeder market, futures traders have benefited greatly from ability to protect the downside while appreciating from the upside. While I do understand either short futures or short call options have hampered some profit potential, the basis alone continues to be of great benefit, as does the cattle feeder. With a belief that this price rally hinges solely on the cattle feeder, and their desire for market share, anything that disrupts this agenda would lead me to expect a sharp reversal in prices.
Corn: Corn has resumed its down trend. New contract lows is bringing corn closer to the chip on the shoulder area. Wheat was able to shake off a lower trade with beans trading a tad higher. I anticipate beans to trade higher.
Energy: Energy was mixed with diesel fuel leading they way a little higher and gasoline and crude a little lower. Diesel has been moving lower and is believed a signal of a slowdown in manufacturing and distributions. Diesel fuel runs the world, while gasoline runs the consumer. Were diesel to continue lower, it would not look good for further economic growth. In my opinion, it needs to stop going down somewhere close to here to remain bullish.
Bonds: Bonds were a little higher. They have already broken out of the triangle to the upside, suggesting to anticipate a softening economy. A combination of lower energy prices and higher bond prices would go a long way in helping the President achieve his desire for a rate cut. There remains a great deal of division between Main Street and Wall Street when talking of inflation. With the employment numbers being unknown, and possibly not nearly as good as has been touted, I am going to lean a little harder starting off the week towards the side of a need for a rate cut, suggesting the potential for a recession. President Trump is volatile and produces great shock factors upon his applying, taking off, and reapplying tariffs. At the moment, beef appears to be appreciating due to some of his volatile tariff action. Copper did to until changes in tariff policy caused it depreciate 20% in just about 5 minutes. Not to say cattle will do the same, but we have already seen what a limit down day looks like at current limit levels, along with a massive exodus in open interest, there are changes being made for which should be paid attention to.
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.
