"Shootin' The Bull" Weekly Analysis...
For the week ending January 14, 2022
In my opinion, factors formed the past couple of weeks, and still forming, have created an outcrop on the wall of worry. Trucking issues are clogging distribution channels, a rise in Covid cases, another winter storm impacting the northeast, and the restaurant industry in dire need of a cash infusion, are some of the factors believed building the outcrop. I have been friendly towards the cattle market and continue to be. However, the most recent turn of events leaves me no choice but to react to the situation. That being, on Thursday night, I informed subscribers to the mid-day cattle comment to buy the $140.00 April live cattle puts on Friday morning. This is a sales solicitation. With hindsight now available, it appears to have been correct due to the heavier placements in December, and an on-feed number just above 12 million head. I think the placements won't be too much impact due to longer feeding times, but the on-feed number will have to be worked on at a steady pace to whittle down. Were it not for transportation issues, and the rise of Covid cases, I don't think slaughter would be taxed by too much. However, with these issues, the increase of slaughter ready inventory, and a desire of the packer to keep margins wide, casts a shadow on the brighter fundamentals. So, I am not bearish or believe a bearish environment is brewing. I believe there are factors to move through that may not produce a higher price, and may produce a lower price to keep distribution channels as clear as possible.
The feeder cattle market is more than interesting. The higher placements in December are believed in direct correlation to pulling cattle off wheat early. Since the majority of those cattle on wheat would not normally move until March or April, it leads me to anticipate a hole to develop in that time frame. How the above impacts the feeders is interesting as well. If they back them up in the Feedyard, they will back them up on the farm. So, feeders were soft today as well. The March feeders trading below $164.00 suggests to anticipate further convergence of basis. I believe there too much confliction at the moment to draw a definitive line in the sand. Today's issues are somewhat negative. By spring, the issues will be whether the drought is broken or not. A break in the drought could suggest to anticipate some light expansion of the herd while further drought would keep the cow slaughter and heifer placement elevated. By the summer, the Fed will have raised rates at least once, the corn crop will be in the ground growing or not, and we will most likely be concerned over something else we can't even think of today. So, as much as I am friendly, don't neglect your risk management. I recommend you consider spending a little time and a little money towards owning put options in the March and April contract months. This is a sales solicitation. If the issues of drought, restrictive government actions, or sky-high corn prices don't create a bear market, then potentially the brighter outlook may allow for the premiums paid to be negated by a higher sale price when the gavel slams.
Grains continue higher with corn on Friday a full-fledged inverted carry market. New crop beans set new contract highs this week and wheat was able to reverse from plummeting price action. I am under the impression that farmers have cash from last year's sales of old crop at above $6.00 for a great deal of it, bins full of '21 product, and no desire to sell. No industry has had the opportunity to purchase inventory at cheaper prices with each cyclical turn of production. The next round of cattle feeding will be done with higher input costs of everything. Whether the industry uses sweeteners, edible oils, grains or anything else, they all have the same problem. So, don't look for inflation to the consumer to go down anytime soon. As well, don't expect a rate hike to help either as this is not an interest rate issue. This is a government created fiasco that is caused by hypocritical mandates imposed upon private businesses, restricting the supply of goods and services to consumers. There are no shortages of commodity goods. The shortages are due to supply line issues and inability to get product where it needs to be. With so much money having been created over the past 20 years, it is much easier for someone to just go bid and acquire the product when their competitor can't. Hence some of the issues seen with favoritism towards the big companies that keeps small business uncompetitive.
Debt instruments sold off sharply this week, but recovered almost all that was lost as equities are showing signs of weakness. Gold was a performer this week. This in some small part may hinge from crypto coin aficionado's seeing some chinks in the armor. Energies charged ever higher through the week with only a minor correction from contract high so far. Lastly, think of how quickly the reliance on the government came with the advent of Covid. Not just consumers, but industries. No doubt the government's actions of closing down the economy, then attempting a staggered reopening, has put some businesses at the top of the mountain of importance that may have never come about without their actions. The cattle industry is one that is now seemingly reliant upon every word that comes from Senators and Congress's mouth to get a "fair deal". Does no one recall the time when the last thing anyone in the cattle industry wanted anything to do with a politician? Now, many are crying on the airwaves for government assistance when the issue has nothing to do with the government. The recent actions taken by the government to handle Covid were awful, and did create significant hardship. However, the cattle industries problems were merely exaggerated by this and not started. The beef processing industry was bleeding profusely through the 2000's until the only way to survive was to make difficult cuts and consolidate. No government officials were called in to help them then. At the exact same time, cattle producers went on a tear and produced more cattle than the newly contracted packing capacity could handle. It has now taken 5 years to finally work through the numbers to achieve a production scale that won't tax packing capacity. With the potential to expand either this year or next, the packing industry will see a cyclical turn in processing of fewer cattle to work with. By that time, the government may be believed so intertwined in the cattle industry, the cattle industry may not be able to benefit from the change of events. How wrong am I on this?