“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

​12/5/2024

Live Cattle:​ 

The margin squeeze is old news, has most likely done irreversible damage to some, with expectations of packers pulling out all the stops to find margin somewhere, somehow.  Today's closure of the JBS plant by the EPA this morning had little impact at the start.  I think it possible that algorithms didn't pick up on this as it appears void from news media.  This is not a new story of the water issues this plant has had, it is that this time they were shut down.  I doubt for long, but any disturbances at this level of price, and length of long positions by funds, could produce significant adverse price fluctuation.

Cattle feeders will be expected to follow suit as margins between feeder cattle and fat are believed at unsustainable levels.  Questions are pouring in on how these recently purchased cattle will make money.  I don't know.  There are only two factors that that I can think of.  One is that some producers are in a vertically integrated supply line and are having to fill inventory needs, at any price, to stay within the vertical supply line.  The other is that some want to grow to a large enough size to be considered in a line of vertical integration and may or may not be assuming risks to great lengths to be attractive to a company that promotes vertical integration of their supply lines. 

I think a very short term fundamental factor, wheat pasture fever,  produced an unintended consequence for which has exposed a belief that there are too many cattlemen for the number of cattle available on the open market. With the advent of rain and wheat pastures, cattlemen went into a furry to fill those pastures.  The furry bled into other weight categories and is believed to have been a reason for the significant increase in commodity fund participation.  Of the most interest is that the squeeze isn't in the fat market, it is between the feeder and fat.  We have the highest number of cattle on feed for this time of the year in a very long time.  The squeeze is in all the weight categories before going on feed.  Hence being long fat cattle doesn't appear to have the same fundamental aspect for a squeeze, as the feeder cattle market does, because there are 12 million head on feed.  With some belief that the funds are recognizing this, they may shift into the feeder cattle market, that has squeezed margins to the cattle feeder enormously. Or, they could abandon positions with packers making every concession possible to find margin or keep it.  

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The long position held by managed money (funds) is noted by the commitment of traders to be at a historical level.  These long's would tend to be commodity funds or speculators, as only a packer (commercial) would have any interest in a fed steer.  While packers may or may not participate in the futures and options market, they have never been known to be significant players in ownership of futures or options.  On the flip side, it appears that commercials (producers of multiple weight classes) have a large net short position that helps them to manage risk of potential adverse price fluctuation.  Now, the most interesting aspect of this large build in open interest of both fats and feeders is where the new longs and shorts are positioning themselves.  I continue to believe that the October 21st date is when the increase of open interest began to be very noticeable.  In the fat market, using the February contract, from that 10/21 date, price has moved about $3.00 higher and $3.00 lower a couple of times, up to today.  In other words, they have made no solid ground and held it to advance further from.  Hence, I think it possible they could capitulate, and with no loyalty to the industry, take their money and go play in another commodity market.  

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Feeder Cattle:​

Feeder cattle futures have been the benefactor of this fundamental aspect that has taken place.  Although cash has benefited as well, the reversal of the positive basis to negative was more than half futures.  Nonetheless, the same margin squeeze is taking place in the weight categories before being placed.  I think the above explains why.  Now all we have to do is maintain this rally for the months needed to put on weight so input costs can be returned.  ​

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Lenders appear growing weary of how sharp a pencil needs to be in order to pay them back.  I've taken multiple calls and text's today with concern over the amount of debt some are incurring.  With some social media comments showing over $2,000.00 being paid for a less than 500# steer and May futures representation of an 850# steer at $2,164.00, where is there margin, or can you feed them for $.32 cost of gain?  The bulls don't care and are believed in disbelief the market can trade lower.  It may not, but one thing is for sure, I know it can. 

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​Hogs:

Hogs were barely firm with the index up $.01 to $84.07.  I believe hogs have topped.  I recommend buying the April $90.00 put.  This is a sales solicitation.  I recommend hog producers, that have price risk exposure, to execute a fence options hedge strategy consisting of buying the at the money put and selling the $10.00 out of the money call to produce a marketing price parameter for the three summer months of hogs.  This is a sales solicitation. 

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Corn:  

Firm all the way around.​

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Energy:

Sideways trading persists in energy.  It is going to break one way or the other sooner, than later.  I do not know which way, but at the moment, technical indicators continue to suggest to the upside.  Fundamentals are that we have very low supplies of oil on hand, with an incoming administration that will attempt to increase oil production.  They may do so, but then again, with the demand at hand, it may not.  The middle-east continues to be a hot spot and with the incoming administration, I would expect any type of threat to be met with fierce consequences.  The best we can hope for at the moment is that the outgoing administration doesn't gift all of the United States money away before leaving office. I couldn't imagine facing the tens of thousands of US citizens impacted by natural disasters here, while giving 1 billion dollars to an African nation.  ​​​​​

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Bonds:

Bonds were a few tic's higher, but notes were a few tics lower.  The US dollar sold off early this morning, but continues to appear as a correction of the up move. ​​

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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.