“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

​12/3/2024

Live Cattle:​ 

Wheat pasture fever has grown contagious.  The desire to own cattle to place on wheat has caused a flurry of activity that is believed bleeding into other sectors.  Some of those sectors are seeing their margins squeezed significantly, if not deep into the red.  A fear is going around that the US is running out of cattle.  That is not the case.  It is that vertical integration has a percentage of cattle spoken for, leaving fewer cattle available in the retail markets for which those outside of vertical integration are clamoring over.  Hence, there are still a lot of cattlemen around and fewer cattle.  So, this begs the question, "how badly do you want to be in the cattle business"?  Recall it is a boom and bust cyclical industry for which if expansion starts in '25, it will do so with historically priced heifers and cows for which will produce more cattle, causing prices to decline as supply increases.  From some, I can hear "that will take a few years and in the mean time, prices will soar."  They may.  Markets can find ways to spoil the best laid plans, and with the change of administration's, I believe consumers won't be able to continue with the frivolous spending produced by the outgoing administration.​

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Regardless of how poor of an example this may be, it is the way I see it in my minds eye.  Prior to 2020, there was only so much money available with actions taken by the Obama administration to keep the money available working.  Hence the lowering of interest rates, literally forcing consumers to invest in equities or other businesses, as depository rates were zero.  When Trump came in, he pretty much kept it the same, but towards the end of his term, he allowed the economy to run a little hot and produced the first bout of inflation.  The Biden administration was handed the Covid issue and they addressed it by printing 3.5 trillion dollars and doled it out at the street level.  Similar to a fire burning, the Obama and first Trump administration kept throwing coal and big logs on to the fire to keep it burning.  The Biden administration threw leaves on the fire to get it to flame up quickly and produce more heat and light to more people.  Doing so used a tremendous amount of energy at one time, for which is burning out, leaving the coals left to start the next fire of significance.  With a doubt that Trump will print more money, I would consider the aspect that he will attempt to benefit employment growth, but not necessarily throw leaves on the fire to heat everyone.  If one wants to work, this administration will most likely be good.  If one lives off the government, whether handout or employment, it is unlikely to be as good.  Long way around the barn to say that, while the price is climbing, scotch the step in behind you.   

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Feeder Cattle:​

​It appears that some are anxious to own even higher priced cattle, but seemingly those who do are not placing them on feed, but further backgrounding them as the lighter weights were either not available or too expensive.  Nonetheless, it is not that there are fewer cattle, there are fewer available on the open market.  Hence, when finished, where ever they are, or weight class, they will be destined to go on feed.  Expansion may take place, but it will be expensive and create a revenue whole for nearly a year and a half to the cow/calf producer.  If expansion does take place, I think that it won't be all at once, and will be to an extent that merely stops the liquidation.  The problem is no longer low prices, it is there is no margin between sectors to profit from.  Only a higher price will suffice in returning input costs or profitability at this time.  

Lenders are on high alert with clients calling in for extensions on lines of credit as they bid inventory higher.  LRP agents should be on the ball with cow/calf operations helping them to secure the 2025 calf crops at what appears to be historical highs for some of those calf weight categories.  A quick view of fat cattle over the past 45 years.  In April of '79, fat cattle topped from a bottom in '76.  It wasn't until 1990 that the 1979 high was exceeded.  A top formed in '93 for which is was until '01 before having exceeded it.  The years of '03 and '08 produced a near double top for which it wasn't until 2011 it was broken.  That pretty much started the drought liquidation and subsequent turn to the 2014 high.  It wasn't until 2023 before the next new high was made and that is where we sit today.  So, while the price is moving higher, history says to store some of it away as it tends to take multiple years to return to highs after production increases.  I just heard you say, "but production increase has not taken place".  You are correct, but markets appear to be taking it into consideration at the moment, potentially undermining the actual occurrence of the event. 

Why am I so adamant to keep marketing, hedging, or exposing negative factors to the market?  Because going up is easy and that is what you want to take place. As well, it is what is taking place and doesn't need anymore cheerleaders to push it higher.  I don't need to convince you the price is going higher, you are already bullish.  You can overcome lots of obstacles when prices are moving in your favor.  The difficulty comes when prices start lower, and you begin managing risk under duress.  Option premiums can swell quickly, leaving you with a lower marketing price.  Marketing on the way up achieves the highest price available at the time.  Options premiums can vary with volatility, but while on the way up, one would have to consider this is the least price paid for put options, and highest price collected for call options.   ​

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​Hogs:

Divergence of basis continues with futures mostly higher and the index down $.85 at $84.36.  I recommend using the over $18.00 wide basis to the summer months to lock this in with an options hedge strategy of owning the at the money put and selling the $10.00 out of the money call.  This is a sales solicitation.  June closed today around $102.50.  I continue to recommend buying at the money or slightly out of the money puts in the April contract as well.  This is a sales solicitation.  

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Corn:  

Corn ended the day soft with wheat and beans at least plus on the day.  I don't expect much to take place between now and the end of the year.  I continue to recommend owning the July call options.  This is a sales solicitation.  You can't buy corn today and store for the next 7 months cheaper than on the board.  As well, with the low volatility of corn, option premiums are not swollen with premium.  Owning, once again, some of the most expensive cattle in the world, one needs to consider input costs a whole lot more closely.  Those calls are believed inexpensive in comparison to what price fluctuation has been experienced in the past.   ​​

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Energy:

​Energy was sharply higher today and is believed to have reversed to the upside.  At Monday's close, I was feeling very disappointed in that all three appeared to be either breaking their up trend line, or sitting on top of it.  However, this morning's reversal renewed my bullish stance, along with this fundamental factor.  The leaves that the Biden administration threw on the fire helped to spur gasoline demand, and not as much diesel fuel demand, as there was little contribution towards business and everything towards the voting consumer.  Gasoline prices traded sharply higher over diesel fuel up to the 2022 high.  It began to settle back down until another batch of leaves was thrown in the form of forgiving loans that were not theirs to forgive.  That created the flurry to the 10/23 high.  From there, gasoline has continued to trade closer to the price of diesel with expectations of contract months in the future reflecting a diesel fuel price over gasoline.  To add some credibility to this, note that for quite a while, gasoline has been in an inverted carry, while diesel fuel was in a carry market.  Through the past couple of weeks, gasoline has gone into a carry market and diesel fuel in a fledgling inverted carry market.  If you think about what this means, it suggests lower gasoline demand and higher diesel fuel demand.  Hence another aspect of letting the fire from the leaves burn out, while stoking the fire with coal and chunks of wood to keep it burning at a pace that may leave some out in the cold and dark.  ​​​​

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Bonds:

​Interest rates were higher, and the US dollar appears to be prone to resume its upward trend.  A higher US dollar encourages imports and discourages exports.  Higher interest rates makes every new purchase on credit more expensive.  It will also go towards increasing the cost of your line of credit at the same time you are needing more credit. There are lot of things that can go wrong that would spoil the best laid plans.  There is only one thing to benefit from, the price of cattle have to go up to profit.  The aspect of jubilation many have felt with the Trump administration is interesting.  His agenda is to reduce inflation with cattlemen betting against him with thoughts the consumer will continue to pay an elevated price for beef.  Lastly, no one has to help you be bullish, I am attempting to help you mitigate that bullishness in order to make the most informed business decision.  ​​

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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.