“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

​11/27/2024

Live Cattle:​ 

Auction's can at times produce a feverish pitch to their attendees that can be contagious.  I think when coupled with the fundamental change from drought to drowning, it is a reason for the abrupt run up in lighter weight categories for which are currently crushing margins to cattle feeders, as some of the fever is spilling over into the feeder cattle market.  As well, when the feeder cattle index did not soften, as was expected during the drought situation, commodity funds and speculators pulled futures up to the levels of the index in quick fashion.  How cattle feeders will contend with the shrinking margins is tough to figure out.  I think it possible that so many cattle are already within a vertical line of integration, that those clamoring over what is left in the open market, may find themselves victim of the bull fever. At the moment, there appears only two participants that are elated of this rally at the moment.  One is the person selling cattle, and the other is the sale barn owner.  Both are gaining great benefit from the past 6 weeks of trading.  On the flip side, the consumer, grocer's, restaurants, packers, and cattle feeders are feeling the narrowing margins caused by the sharp gains in lighter weight cattle.  As well, anyone on the receiving end of these higher priced cattle may have buyers remorse at some point in time.  Auction's can create a sense of urgency that may not see others react in a similar manner.  Long way around the barn, but I expect the thinning margins to create some changes in bids, potentially causing some of the higher priced cattle to soften.  

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Let's say that for whatever reason, cattlemen are going to push feeder cattle prices to above the current index reading.  With previous recommended positions in feeder cattle, the short call option of the options strategy can produce unlimited losses.  Recall though that until the position is closed out, or the index trades above the short call strike price, losses are unrealized.  The realization of losses can be from closing out the short call position, or if the underlying index is above the short call strike at expiration.  Then you would take the amount of premium you collected minus the last trade and that is your loss.  As margin requirements are starting to become an issue for some, consider a couple of factors before acting.  One, regardless of market action, until the gavel slams on your cattle, you know exactly what your marketing parameter is.  Second, there is no telling what type of price action can be seen in the coming months with two expectations believed equal.  That being, fewer cattle to work with, versus an incoming administration determined to reverse actions of the outgoing. As we see the Biden administration hand out another 10 billion in grants and loans as they leave office, all of that is expected to stop. As well, those employed by governments to see after all the illegal immigrants, there jobs are dropping quickly.  Then imagine not having to feed millions of people three meals a day, every day.  I think the demand for a great deal of commodities will soften, due to demand softening.  Why would demand soften?  Less government spending.  If the government doesn't print more money, we live off what is available.   

Lastly, for those unable, or not wanting to remain marketed up to your physical sale, consider what the current loss is, how much more you think the market will go up, and what will you do, and when, were prices to not advance?  As you were asked to put pencil to paper, prior to initiating position, I would encourage you to do the math again, and you will still come out with the same marketing parameters you did before initiating the position.  I think you will see the consequences are the same after the fact as before.  What many are seeing is that hindsight is 20/20, with a dramatic change of fundamentals currently producing the flurry of activity. The dramatic change did not remove one head from production, it simply moved them to a different kill slot. I don't think backgrounders are too elated either, as their margins have shrunk dramatically as well.  

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For the next round.  Those on the receiving end of these high priced critters will be staring into a future with no premium to market inventory at a higher price than today.  Even all the way to August, the $7.00 premium appears minimal in comparison to the $27.00 premium August of '23 once held to the index.  So, although you may be perplexed at the moment with cattle already hedged, your assumption of risk for the most recently bought will be expected to overshadow any hedge placed too soon on previous purchases.  So, there is an unfortunate at the moment where some cattlemen could be grieving over small losses on hedges, all the while increasing their risks immensely with the purchases of recent inventory.  No time to second guess yourself on this one as the higher cattle prices go, the fewer participants, and greater exposure to loss one takes, will be expected to help further solidify vertical integration.   

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Energy:

​Energy ended the day lower.  I continue to be fully aware of contradicting myself on expectation of energy prices moving higher, while the current administration is taking steps to reduce the demand for commodities.  The wave count has a great deal to do with the analysis on energy.  If incorrect, I don't expect it to take long to push crude to levels that suggest I am wrong.  If correct, energy is a world commodity that is influenced by factors outside of one nations control and has the potential to soar, regardless of intervention.   ​​​​

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Bonds:

​Bonds were firm again today.  The US dollar was lower.  I expect these retracements in both to be minor corrections.  ​​

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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.