Live Cattle: The industry appears to be collectively holding their breath for what may come next. Futures traders appear nervous, even with the positive basis. Cattle feeders are enjoying near, if not record profits due to the sharp rise in fat cattle prices. With feeder cattle now $45.00 to $5.00 higher than when placed, producing today's profits, it appears fats will have to continue higher in order to return input costs. This is all well known. What isn't known is how long some can survive with a little hope that expansion will take place in a meaningful enough manner to produce more inventory to work with. Since there has never been a herd increase to equal or exceed a previous level, even if there is a massive expansion effort, it will be expected to fall short of previous levels. With no voluntary contraction in production capacity, paying top dollar for inventory and nowhere to market close to today's price level, the situation is going to get even more interesting.
Feeder Cattle: Traders took another look at $300.00 this morning via the August contract, but fell short of Tuesday's attempt. I have no idea if futures traders will continue to push premium on to contract months with the index seemingly finding some resistance at just under $300.00 as well. Regardless of next most probable price direction, the basis remains so much better than the fats, one may want to consider simply taking advantage of this by paying somewhere between 2.5% and 4.4% to cover 100% of the value of the contract. At present, the best case scenario is the cattle feeder continues to bid higher, and consumers don't balk at price. The worse case would be a near instant swap in basis from negative to positive, produce a deep tiger trap, and then start a bear market in cash. I could feel the "snicker" when you read "start of a bear market". However, this is a commodity market and subject to fundamentals known, unknown, and anticipated.
Corn: Grains are volatile, although in a fairly narrow price range. Cattle feeders are currently afforded a $.50 lower corn price than just last month for corn. Options to secure the lower price are recommended to help fix input costs.
Energy: Energy saw both sides of unchanged today. Energy looks like it could easily resume its down trend, but at this price level, doesn't appear to have the bears to drive it down further. As in corn, options on crude oil may or may not help to mitigate the potential for adverse price fluctuation, helping to fix variable input costs.
Bonds: Bonds were plus on the day after the FOMC meeting. As expected, they did nothing and in my opinion, for good reason. The inflation impacting consumers discretionary spending habits, barring beef, is not being caused by commodity inflation. It is being caused by the increase of insurance premiums, commercial rents, state and local taxes, HOA fees, and most services of utilities and repairs.
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. .
