In my opinion, the week ended with a lot of economic and industry data to digest over the weekend. The on-feed number moved back above 11 million head with expectations of a seasonal tendency to increase placements. With no news on an increase of cattle supplies, or reduction in tariffs, price action is believed solely dictated by demand. At present, beef demand appears shifting again. The lower box price through the week is believed testament to. This has opened a gaping hole of negative margins to packers. This leads me to anticipate packers to shift, wiggle, squirm, or dance a jig to slow the losses. How this impacts the production side of cattle will be more than interesting to see. The industry continues to ration producers and it appears that regardless of what may take place, more working capital is going to be needed to manage input cost increases that may have to include a form of derivative to help mitigate potential adverse risk.
Basis narrowed by weeks end with futures traders filling holes dug earlier in the week. The basis spread is definitive in the feeders with backgrounders having seen the basis narrow this week for fall marketing's, and cattle feeders having benefited by the sharp discounts created in the spring months. Cattle feeders basis improved as well with fat futures trading higher and cash varying slightly between north and south. Regardless of whether packers pay more for cattle, or attempt every antic to drive prices lower, December and February fats are going to be the most expensive cattle placed to date. Along with other input costs not having subsided, trying to maintain the value is believed crucial. As above, more working capital is going to be needed to make the best marketing decision. I recommend you put pencil to paper to see how much risk you wish to assume, and how much you are willing to pay someone to assume the portion you do not wish to. Recall that with the wider positive basis, futures can expose one to both basis and adverse price direction risks. Options and options strategies may or may not help to mitigate portions of the basis spreads while still offering the downside price protection.
Corn is as abundant as it ever has been, but remains priced above most expectations when it comes to desired input costs. Farmers are hoping for a trade deal with China. With the Tic-Toc issue apparently now behind the two, maybe they can focus on the grain market. Regardless of a trade deal or not, South America is anticipated to increase their production of both corn and beans. Energy was little changed from last Friday. I anticipate energy to firm. I recommended through the week to top off farm tanks and book harvest or fall transportation needs. Bonds were able to stretch just a little higher after the release of the FOMC meeting, but have fallen off quite a bit from the top. With another cut expected, and the knowledge that the reason for rate cuts is to stimulate the economy, suggests the economy is not doing as well as expected. In Powell's comments this week, he stated the consumer faced two fronts of weakening employment on one hand and inflation on the other. This is pretty much the definition of stagflation. As well, this will further support the idea of a two-tiered economy the CEO of McDonalds spoke of a few weeks ago. Lastly, cage free sales have dropped noticeably, potentially a recognition that even those on the upper tier are cutting back a little.
Christopher B. Swift is 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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