“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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8/5/2024

Live Cattle:

My opinion alone is that none of today's price action has anything to do with cattle or beef production.  It is obvious the leverage the cattle feeder has, as well as the backgrounder, simply due to the lower herd size.  This does not, and won't matter with the consumer believed contracting in spending. Yes, economic data masked this for months as government spending and hiring kept the mask up that all was well in the economy.  We have suggested for months that the economy is not in good shape and with the mask falling, and exposing the consumer weakness, it sets the stage for a decline for which will be more difficult to assess than when or if more cattle will be available or not. Packers are continuing with their portion of the agenda by cutting slaughter pace further, allowing for more pounds per carcass and keeping retail beef high for the consumer.  A great deal of packing capacity was created during Covid. So much so, that with fewer numbers, packers are having to attempt to out bid one another.  This won't last long as all that has to transpire is a few regional plants to go dark or reduce schedule to reel back in profit margins. That is exactly what took place in the 2012 through 2014 time frame.  This all took place just a year before expansion of the cow herd hit a grand slam home run of production.  Were packing capacity to begin to be trimmed, and producers begin expansion in earnest next year, I can see a very similar price scheme to develop as to the 2015 through 2020 time frame.  At present, feed yards are chocked full of expensive feeder cattle.  Last week, the cattle feeder lost all but $9.00 of the over $200.00 per head profit seen in June.  This week, they will go backwards and stay that way until at least the steer placed today is killed in 5 months, or the fat cattle market rallies over $200.00 and stay's there. 

​Feeder Cattle:

​Cattle feeders are believed to be chocked full of expensive feeder cattle.  I think they are seeing the same aspects of consumer contraction in discretionary spending and will therefore begin to show reservation in bidding.  Some entities may have garnered the market share desired and will now wait to see what pieces can be picked up from the enormous price range everyone had to contend with. Some of the highest volumes of stocker and feeder cattle changed hands last week in the past 3 years.  Last weeks volume exceeded week over week, year over year, and above the 3 year average.  All of those who sold are flush with cash and expected to stay that way for the time being or you start buying expensive cattle again. All of those who bought are flush with the most expensive cattle in history and are expected to have to do whatever it takes to keep from losing a large percent of working capital.  For the past two weeks I have made the statement to do whatever it takes to put a floor underneath your production.  I hope the extensive work done to develop this analysis, and make the difficult recommendations, did not fall on deaf ears.  

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What's next?  Depends on how you are positioned.  If you have done nothing, you need to call me and allow a strategy to be worked out.  If you have taken steps to either avoid this or benefit from, there are multiple ways to arbitrage between derivatives to shift your risk in a manner the most favorable to you.  If you are a cattle feeder, this is the best positive basis spread since December of '23 and it was 19 months prior to that.  So, if you have been complaining about no where to buy cattle in the future for less, here is your opportunity. Recall that a 10% decline of the index would produce an approximate target of $235.70.  Where did January futures close today? $235.90.  If you think cattle will be higher, or reach this level and reverse, here is your opportunity to own them already at the expected price of the index.  The pendulum swings both ways, don't get stuck only looking one way. 

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Hogs:

​Hogs shook off a sharply lower opening to close on the high of the day.  In the December contract, today's low appears to have completed a wave 2 correction.  With a gap left open of 1 tic today, a gap up tomorrow will be viewed as a buy signal.  I recommend buying December hogs on a gap higher opening Tuesday with a sell stop to exit only at $66.90.  This is a sales solicitation. 

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Corn:  

​Corn and beans may find some support from the sell off of everything else.  One would assume that short grain positions are profitable and may be a place to find money to meet obligations created from other markets.  On the 12th of August, the USDA is expected to change the acres planted.  It appears that at the moment, the guess is they will lower the number of acres planted.  As corn and beans are believed to have made adjustments between flood and drought issues to the increased yield of all that was not impacted, something new, like a change in acres, would be expected to produce some price fluctuation.  Since we have agreed to not get too bearish at the bottom, or too bullish at the top, I am going to recommend  you do something that would reduce exposure to the upside.  The wave count shows 5 down and although targets were not achieved, the count stands as 5 down.  Bean meal soared today and made new highs from 7/18 low.  The price decline from contract high to low, when coupled with low carry spreads, makes this a very attractive buy to end users. Although up nearly $8.00 a ton today, it is believed to have just tipped its hand. 

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Energy:

​Energy continued to plummet today. However, by days end, the unrest in the middle-east continues to spark fears, pushing energy plus on the day.  Regardless, down is the direction believe the path of least resistance with more expected as the realization of consumer contraction in discretionary spending is just starting. ​​​

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Bonds:

​Bonds continued to soar as government overspending has superseded the greater decline of  consumer spending, now reflecting what appears to be more in line with main street than wall street. Consumers are broke and are believed have been for quite some time.  No amount of student loan forgiveness will help to restart the consumer.  Only vast amounts of newly printed money is expected as the way out of this mess.  Until then, the current government spending will go to house, feed, cloth, clean up their excrement, pay medical expenses and attempt to some how acclimate them further into reliance upon government every day.  Think about that "every day" aspect.  I see the carnage in England of their plight with immigration.  My opinion alone is to not denounce the immigrant, but the injustice the government has done to them by allowing them here with no resources available to contend with them.  Hence why all of the expense taking care of them is so elevated and consumers flipping the bill.     ​​​​

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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.