“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

​1/7/2024

Live Cattle:​

Sound business practices, expectations on rate of return, and alternative investments are being tossed out the window for the opportunity to own over priced, labor and input intensive cattle on expectations of the price going even higher.  There is not a doubt in my mind that cattle can continue to climb higher.  If they do not, I anticipate a very sharp sell off in the futures market for which basis may not converge with futures higher, but cash lower.  Again, there is no doubt cattle prices can continue to climb.  The Moore Research, for which I use and keep by my desk, suggests that June, August and October live cattle tend to top in the first week of January, with June potentially double topping in February, but August and October only attempts at.  

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I recommend you own an at the money put option on every head of inventory you will market through October that is currently on feed.  This is a sales solicitation.  If it is not on feed, then do not hedge it as you do not know what the feeder steer may cost when placed. Right or wrong, you are capturing a historical price for cattle that won't be marketed for 5 months for which the price may or may not be higher.  These are some very fat birds in the hand for no telling what the two in the bush will look like. If like some, you are not able to lock in a profit with futures, that in itself should be telling you something about your purchasing practices.  Cattlemen have outdone themselves with pushing prices higher.  The packers have fought being short bought for months and "if" they ever get a toe hold on margins, I don't think you will be able to pry it from them.  

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Feeder Cattle:​

At today's new index high of $272.29, it creates a value of $136,145.00 on a 50,000lb contract. This is approximately $2,314.46 per head. With the sale of a 1400lb fed steer at $197.00 it equates to $2,758.00 per head for a gain of approximately $443.54.  To put that 550lbs on, it costs something, so maybe $.90 cost of gain would be another $495.00, seemingly making this a losing proposition.  If you place $136,145.00 on a 6 month CD at 5%, it makes $3,403.62 in profits or approximately $57.68 per head gain without having to have bought the cattle or fed them.  I fully understand that if you borrow money, this won't work, or if you had that money sitting around, you would most likely pay down debt, currently at 8%.  So, this isn't an apple to apple comparison, but it does go to reflect that investing in cattle, at all time historical highs, with input costs on the rise, and a consumer that has been noted as resilient, has risks well out of line with any traditional form of investment.  Not only that, lenders and others will be watching closely to see how you are spending their money, how much risk you are assuming with their money, and if found to be a risk to the lender, could easily have your loan called.  The elation of a few marketing in this time frame is expected to be detriment to all others who are purveying inventory at these price levels.  ​​

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With today's higher index reading, and above $270.00, any lower trading in futures would be viewed as skepticism creeping into the markets as to how much higher will someone pay to stay in the cattle business.  Do not forget, this is a time frame of great contraction in the industry.  There is too much production capacity for the number of animals available.  Therefore, consider what cuts may have to be taken in production capacity to continue to make ends meet. With having been schooled more than once that there just aren't any more cattle, this should ring very true for you.  If attempting to remain at full capacity, the extent of capital outlay is highly recommended to be managed with options on futures contracts.  If lenders need help, we have the tools, resources, and experience to help you manage the risk your clientele is currently assuming.

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​​Hogs:

​Hogs were soft on the front end and just plus on the day in the back.  The index is down $1.11 to $82.10.  This is a new low from the summer of '24 high.  I anticipate the index to decline to approximately $75.00.   ​​​

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Corn:  

All three shook off a lower trade to start the morning, but beans stayed down on the day at the close.  Corn was mostly unchanged to a tad higher.  I anticipate corn to continue higher as it appears to be on board with this most recent bout of inflation.  Soybean meal has not moved out of my sights.  The recent $30.00 swing gave back half of it to this morning's low.  If you have soymeal feed needs, I recommend you own the at the money call options in the month you will take delivery.  This is a sales solicitation.  ​

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Energy:​​​​​​

Energy traders shook off Monday's lower trade.  Although still about $.50 from Monday's high, I expect it to be taken out with an upside target above $78.00. I'll be switching contract months next week.  Both crude and diesel fuel are now in inverted carry markets.  Top of farm tanks, book some spring fuel needs, or buy call options on crude oil in an attempt to thwart the potential for a higher price.  This is a sales solicitation.    ​​

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Bonds:

​Commodity inflation is up approximately 9% in the past 4 weeks via the Bloomberg commodity index.  Diesel fuel is up 11%.  Consumers continue to spend at an elevated level, having kept months of inflation data at the top end of trade guesses.  The spread between the Fed window and retail rates is one of the widest I've seen in a very long time.  If able to borrow at the Fed window, imagine the spread on money you are making.  So far, higher prices of goods, services, commodities, and interest rates have had few impacts on the consumers resilience for spending.  At present, I can see this as we seemingly can't get rid of the current administration attempting to spend and give away as much as possible in the next 8 business days.  Everything the Biden administration has done has been with spending and has created an inflationary environment ripe for another bout. If the incoming administration can accomplish half of the goals touted, I look for a great deal of weeping and gnashing of teeth.  

Equities are down sharply today and most likely, since this is "the" most inflated market there is, has as great a propensity to decline under the new administration as it does continue higher.  All of this and cattlemen continue to clamor over one another to own what appears as a very poor investment.  ​

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​​This is intended to be or is in the nature of a solicitation. 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 the 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.