"Shootin' The Bull" Commodity Market Comments...

For Tuesday, August 9th

Live CattleThe jostling back and forth between inflation and recession is anticipated to keep the consumer status quo on discretionary spending habits.  Even with the increase of employment, retail meat sellers are believed settling in to a lower volatility environment that may widen margins to a level that could remain for the remainder of the year. Retail meat sellers are believed wanting to reduce price volatility and distribution issues in an attempt to produce a less volatile price mechanism.  By doing such, they can somewhat keep prices to the consumer steady while lowering costs of supplies, increasing their margin.  I think one has to consider this going forward as only the cattle feeder desires price volatility for which they can potentially lock in a profit.  Without, seemingly there is no profit potential if one just keeps taking what is offered on the day they need to go. Lastly, it is believed that some are now experiencing the other side of vertical integration as seemingly some are literally forced to bid up for inventory.  Having to meet contractual agreements are much different than going on your own. They entail other factors that may not be conducive to your feeding program.  As in, you have to meet those contractual agreements, regardless of how egregious it may be for you to do so. I think this is where the industry is, in its attempt to further vertical integration. A sudden price decline would be anticipated to expose the weaker participants and potentially go to find the ones that will be able to meet the contractual agreements.  

Feeder CattleA quick poke at the calculator will lead one to believe that input costs have risen greatly, but not necessarily profit margins.  Yes, I hear of $30.00 to $200.00 per head profit.  However, the input costs make these returns significantly lower percentage returns on capital.  If there are some truths, that meat retail sellers are attempting to lower their volatility, something will have to give in order for cattle feeders to keep from losing further margin.  This leads me to believe that at some point in time, input costs will make a difference in how much is paid for incoming inventory.  You are correct, I have yet to be right on this scenario.  I have been perplexed of how the changes within the industry are going to take place.  Clearly something has changed with cattle feeders ability to overcome all obstacles and not be screaming of no profits.  Like the fats above, one way to now separate the wheat from the chaff would be to drop the price cattle feeders pay for incoming inventory.  I understand the adage of "if you are going to be in the cattle business, you have to own cattle".  However, there is nothing in that phrase that protects one while trying to be in the cattle business.  I have already recommended everything I know to in an attempt to capture premium available in the futures while maintaining a minimum sale floor.  I think the rest is up to you.  Input costs are expected to be higher going forward, and to date, that has had little impact on the amount paid for incoming inventory.  So, I am less likely to anticipate a decline in feeder cattle prices due to higher input costs.  Unfortunately, the disregard for the increased risk of using more working capital could be the unwinding of what seems to be exceptionally high input costs in comparison to shrinking margins to cattle feeders. Yes, I did just contradict myself.  Hard not to at this juncture.  

Lean HogsHogs soft with the soon expiring August a tad higher.  The index was down $.17 at $121.92.  

CornCorn closed higher on the day, with December having two unfilled gaps.  While the most recent is not far from being filled, I think it will be more of a challenge to fill the lower one.  Nonetheless, I expect every trick to be pulled between now and Friday's report.  Whether high volatility or none, with the recognition by the USDA that this year crop is not stellar, leads me to anticipate a higher trade in corn and beans.  I recommend you own half, if not more of your feed needs going into July of next year with call options.  This is a sales solicitation.  I believe that the premium paid will be averaged out quickly going forward.  Whether that is through lower grain prices or higher.  Lower and you will be paying a little bit more each month than those that did nothing and still able to benefit from the lower grain trade.  Higher though and not only will you average in the premium, but also potentially benefit from the price rise. If I am right or wrong, I believe the price difference between today's close and the top or bottom will allow for the premium paid for an option to be averaged in without it being damning to your operation.  At present, rough calculations have at the money puts at approximately 6% of the value of the December contract, 8% of the March, and 9.7% of the July.  Consider if prices drop in half, back to $3.00 or $4.00 or $5.00.  A $1.00 drop is approximately 20%.  So, with these percentages, and the increase they have already seen, consider how you will react to a fairly significant change in price, in either direction.  What I don't believe is that traders will stop moving prices at just a dollar move.  You have 2 days and about 4 hours of trading to make some important decisions going forward.  I recommend you put pencil to paper and get busy figuring your feed needs. 

EnergyThe past few sessions have been exceptionally different.  That being, one product sharply higher or lower than the other, and crude prices lower with products higher, or vice versa.  The petro parlay, spread between gasoline and heating oil, has been exceptionally volatile with $.15 to $.25 spreads, back and forth for months.  Combined with crude trading lower on the day, and products sharply higher, is difficult to assess.  Regardless, it appears that no increase of production is going to be seen and the mild transition from fossil fuels to whatever, is going to remain painfully slow.  This factor is anticipated to keep new oil production from taking place.  Until or unless there is a more friendly administration towards oil, I see the executives leaned back in their chairs waiting for the next President.  

BondsBonds were a couple of tics higher and the notes a couple of tics lower.  I anticipate the interest rate market to go dormant.  The confusion between inflation and recession is such that no one knows what to do or how to do it.  The US dollar was mixed against the major currencies.  

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
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