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

For Monday, March 18th


Live CattleThe consumer is on the verge of additional sticker shock by weeks end.  Gasoline is up another two and a half cents today.  This is tacked on to the $.23 in the past 7 days, and a new contract high for the May contract. Money is more expensive with bonds down again.  Grains are off their lows with not a great deal of expectations for them to trade much lower until the crop is in the ground and growing.  The Fed will be less likely to turn dovish on this weeks FOMC meeting as the past two months of inflationary data was running hot.  Were they to talk in a more hawkish tone, the ripple effect could cause consumers to once again, have to shift uncomfortably in discretionary spending habits.  
The rationing of cattle continues as cattle and beef prices are higher.  On AgriTalk radio, with Chip Flory today, I discussed with him the aspects of the rationing and potential to lose consumer demand.  There would be nothing more disappointing for a cattleman than have all that hard worked passed by at the grocery store meat counter due to the price being too high.  The individual elation of higher cattle prices is self serving to only a few as the industry as a whole recognizes the difficulty of reestablishing lost demand.  Nonetheless, rationing will continue, similar to the beatings will continue until moral is restored.  Margins in all sectors are shrinking.  This time frame is a large transfer of risk with those on the selling side enjoying historical prices and those buying are doing so at historical prices.  This can only suggest one thing, the price has to be at a new historical high when finished to make money if bought at historical high at the onset. Other than that, this time frame will be one of attrition.  Those that can lose the least, or have the most money to withstand the prevailing winds of this cattle cycle, will continue to be part of beef production.
Feeder CattleTraders turned the spreads between starting feeder and finished fat today.  They had pushed the spread down about $7.00 before starting to widen it back out today.  Every tic spread wider between the two is less margin to the cattle feeder.  The rationing will continue until cattle or beef demand begins to drop.  By that time a great deal of vertical integration will have taken place.  Ownership of very expensive breeding herd will then try to return working capital on most likely lower cattle prices as history reflects.  As you approach managing the working capital you have at risk, consider your ability to accept the consequences of  your marketing actions. You can write out multiple marketing avenues to take, whether hedging,  not hedging, or using LRP insurance policies.  Calculate what your hedge will look like on your sale date if prices were unchanged from today, or any amount higher or lower, and just see what your marketing will look like at those prices levels with the action you wish to take.  Again, that could be nothing.  However, be fair and look at what prices look like lower, and unhedged to get a good look at what your marketing bottom line will look like.  My recommendation continues to be to manage the risk with a fence options hedge strategy that provides leeway in marketing price between the two strikes.  As well, hope for convergence of basis at the widest width of the spread, in order to achieve full convergence of basis at expiration.  How can something that simple be so complicated?  Mostly due to the margin requirements to sustain a hedge until fruition of the marketing time frame, exposing your marketing decision for potentially months prior to physical marketing.  In other words, can you live with the hindsight?
What producers and actually all traders want to know is when is the market going to turn, or will it stay higher. Neither you or I know and therefore, we take our most informed decision and put it into action. Then, it simply becomes how well you can live with your marketing decisions. 
Hogs:  Hogs were mostly higher, except for the April.  The new highs in the June contract continue to prove my previous analysis wrong. 
CornI recommend cattle feeders, or end users of corn to fill every nook and cranny with spot priced corn.  It may go lower, but I think until it is in the ground and growing, it will be difficult to push it lower.  Especially now with energy having broken out to the upside.  I think energy is going to move higher with this breakout forming.  Gasoline is at new contract highs and ethanol production elevated.  Diesel fuel is on the verge of breaking out as well.  I believe soybean oil should be looked at carefully if an end user of this.  I agree, there are few aspects that would make corn or beans trade higher.  However, they may not trade much lower either.  Hence filling up now for use out to July, may be ideal as beyond that time frame, the crop production will be closer to known.  Wheat is important.  Simply due to it having been in a long term down trend, with fewer acres and more acres going to be grazed out suggests wheat may be finding a bottom around this area as well.  Again, I am not looking for a bull market, just not a bear one either. 
Energy:  And they're off.  Energy finally started higher and this goes back to initial thoughts from last fall.  The beating of energy lower into January, and then the analyst's from the Chicago meetings all bearish, I turned bearish.  That is neither here nor there at this point in time as direction is believed set for the time being.  Energy higher will be anticipated to force the consumer to shift uncomfortably once again to try to have more money at the end of the month than month at the end of the money.  
BondsBonds are lower and with the bout of inflation at play, I anticipate bonds to continue lower.  I was wrong on inflation subsiding and I was wrong in thinking that the Fed would become more dovish.  They most likely have little choice but to stay as is, or actually, may let this inflation run for just a little while, in hopes it may do some of their job for them in quelling consumer spending.  As higher prices are the cure for higher prices, pushing more items out of reach, and a Fed determined to cut inflation, leads me to urge caution on hoping cattle prices just keep getting higher.  The only reason now for cattle prices higher is so those that bought them at the tip top can get out. 

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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