Live Cattle: Backgrounders are starting to see what cattle feeders have been having to deal with for months, a positive basis. Even with the index up another $1.23 today, at $315.85, the futures trader was not willing to step out in front, or even side by side, but chose start fading further back. With calf and stocker sale prices having rallied as sharply, a positive basis in the feeder cattle market would begin to subject backgrounders to unmanageable risk.
The wider the positive basis, and higher price paid for incoming inventory, the more risk the cattle feeder assumes. Today's price action only grew worse for cattle feeders with the index at a new high, and October and December fat futures down on the day. Margin calculations are not difficult to assess. The manipulation of margin calculations is extremely difficult to assess as margins vary greatly from one producer to the next. Those manipulations range from lower cost of gain to the farmer feeder, to growing them as big as buffalo's for commercial yards.
Futures traders appear a great deal more skeptical about sustainability of higher cattle prices, as well as probably concerned over the issues in the middle-east. Cattle feeders are believed in a "have to" position or are in a part of production for which the current manipulation is still reflecting positive margins. As this is a historic time frame of consolidating the industry, just like poultry and pork, there is no telling to what extent one will put themselves through.
Poultry consolidation came with the advent of major chicken producers contracting production with all sorts of promises, gimmicks, and guarantees to get individuals to build large poultry houses to supply them with chickens. That worked until it became saturated, margins shrunk, and only the most efficient, which tended to be the larger operations, stayed in business.
Pork was as simple as driving the price down to $17.94 of the lean hog index and $20.70 December futures, both in December of 1998. This low was only $4.90 from the 1971 low made 28 years earlier. Imagine how much input costs had gone into production over 28 years for prices to fall to within $4.50 of that latter time frame. I still have in a desk drawer a check for $25.00 that I paid for a 250# top hog. With a $75.00 processing fee on top of that, the hog processing of was 3 times higher than the product.
Cattle are slightly different, simply due to the length of time to produce. Other than that, contractual agreements can keep cattle from ever showing up at a sale barn or video as it is part of a vertically integrated supply chain. So, to think that cattle are not capable of being vertically integrated, they can, with great attempts being made and some achievement starting to show up. My opinion continues to be that commercial meat sellers want greater control over beef protein production in an attempt to lower the volatility of price. In an attempt to achieve such, the price is being pushed higher, leading me to not know to what extent some will go. Greater singular control of more inventory can shift production schemes that fit that entities needs better than what currently is available. This is a dynamic time frame of significant change in the cattle industry with cattle feeders assuming a great deal of this risk.
Feeder Cattle: Futures traders are starting to back off from being the backgrounders best friend. Positive basis is now forming in the August and widening in all other months. This actually could be of great benefit for hedged backgrounders. As basis has been narrow, even, or negative, the swap to positive would suggest futures lower or cash substantially higher than futures. Although hedged cattle feeders have relinquished some profit potential, due to the hedge, the positive basis has been of great benefit. From now until the second week of July, when the bulk of video sales will be over, a positive basis spread will help producers already hedged, and place newly acquired calf/stocker inventory in jeopardy due to discounts in feeder cattle futures. It appears that the basis in the feeder market is soon to follow the fat market.
Corn: The WASDE report didn't do much to corn, but did push beans and wheat a little lower. There seems to be very little desire to push grain and oilseed prices a lot lower. With expectations of higher energy prices, and potentially sharply higher, ethanol and bio-diesel would be anticipated to find good support.
I recommend buying November '26 soybeans with a sell stop to exit only at $10.24.
I recommend owning December Chicago wheat with a sell stop to exit only at $5.50 and March with a sell stop at $5.75. This is a sales solicitation.
Energy: Energy prices traded higher on the evening opening session and has seen both sides of unchanged a couple of times today with a wide price range. Energy is in a fledgling bull market with a great deal of tension in the middle-east. For those that can't recall the $150.00 per barrel oil price in 2008, I can tell you that consumers were strapped beyond belief in trying to manage $4.00 to $6.00 gasoline for several months. So, while still a fledgling bull market, and no escalations "yet", I recommend you top off your farm tank, own slightly out of the money call options in the October and December contract, own the short dated August calls that expire the 17th of July, or forward contract some fall harvest needs. This is a sales solicitation. I anticipate energy to trade higher, if not sharply.
Bonds: Bonds are higher. The PPI was higher, but not as high as expected, therefore, the higher bond price. This was the same for the CPI on Wednesday. A bond auction went well today as some are attempting to lock in the higher depository rates, with some buying believed a flight to quality, considering the middle-east turmoil.
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.
