In my opinion, businesses in general attempt to find margin between the raw material and finished product for which to profit from the manufacturing of. At present, cattlemen have adopted a business plan of manufacturing cattle with a start of the raw material at just under, equal, or unfortunately higher, than what the finished product will bring. Why would one do that? There is a fundamental shift taking place for which there are more cattlemen than there are cattle. Hence, everyone is attempting to find their place in the industry. As prices move higher, it will ration the number of producers that can assume the greater financial risks, as well as continue to promote alternative factors of beef production. That is what rationing does and this is rationing in its grandest form. Even with stupendous gains this week in open interest, the futures trader remained just reserved enough to keep from offering producers a premium to work with. Marlin Bohling and Dr. Derrell Peel posted a short video this week that I found to compliment factors discussed this week. Knowing Marlin very well, and having interviewed Dr. Peel on several occasions, I very much respect their opinion. Their comments can be found HERE.
Open interest swelled this week with both fats and feeders making substantial gains in the interest of these markets. Cattlemen continue to clamor over one another for ownership. As the situation that started this flurry of activity is believed receding, the gumption shown to own cattle, at any cost, is expected to soften. With the advent of wheat pastures, cattlemen sprung to action to fill them. As the number of cattle available declines, cattlemen became more aggressive, leading us to the new historical highs, further rationing the number of producers that can afford them. However, it has come at a significant cost to margins. The Daily Livestock Report showed on Friday that 4-5 weights are $80.00 to $105.00 higher prior to Thanksgiving, 5-6 weights $50.00 to $70.00 higher, and via the feeder cattle index from the November 14 low, it has risen only $14.00. This reflects the margin squeeze between a few of the sectors.
Paul Tudor Jones is a famed commodity trader. His comments this week on one of the financial channels were that he believes commodities are undervalued in comparison to other markets. I do not doubt him. As much supply that is on hand in corn, it appears senseless to buy corn. However, with costs of production at already an outstanding rate, adding insult to injury would not go over well. I continue to believe fixing a few of your variable costs now, will improve your margins going forward. While there is potential for corn and fuel to trade lower, they have been trading lower for some time now, seemingly having found some fair market value. Any disruptions in supply going into 2025 would be expected to worsen current feeding margins. Fuel, feed and interest rates are input costs that can be managed with options on futures contracts. A long option gives the buyer the right, but not the obligation, to buy or sell a futures contract, at a specific price, called the strike price. For this right, one pays a premium that is determined by length of time to expiration, proximity to the underlying futures contract, and volatility. When putting pencil to paper, calculate margins at present prices, then consider a higher and lower price for input costs to see how dramatically a move one way or the other will impact your operation. Calculate your interest charges to see if there is a need to fix some debt. Next week will be the last full week of trading for the year. We hold strategic planning meetings that help us to discover our strengths and weaknesses of our company. With some down time coming, I highly recommend you do the same.
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
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.
