End of Day Market Recap

by Christopher Swift

​2/14/2025

Live Cattle:​

In my opinion, packers are taking charge.  Slashing slaughter rates in an attempt to back cattle up and keep beef prices elevated is age old manipulation of the market to achieve margins.  As stated this week, packers are "making" their own margin instead of seeking it. This factor will skew the supply/demand picture for box beef as known supply cuts should make less beef available, keeping prices elevated, but not necessarily a reflection of demand.  Now, consider that were boxes to soften further, with knowledge of lower supplies, it will be considered a reflection of weakening consumer demand.  Next most probable move will come from cattle feeders.  Having historically high inventory in the yard, and now packers attempting to back up supplies, leads me to believe they will have to find a way to "make" their own margin, or continue with the strategy of having to have a higher fat price to produce a profit.  I likened this to each attempting to write their own destiny.  In doing such, it appears packers are doing what they normally do and it has tendencies to work.  However, the cattle feeder attempting to run a full motel at current price levels, and no margin, seems contrary to aspects of reeling in expenses. Cattle feeders are expected to have more inventory to work with this spring as wheat pasture cattle come off and distribution lines smooth at the southern border.  

There is a stark down seasonal tendency for fat and feeder prices going forward from Friday's close, via the Moore Research.  Although markets do not necessarily have to follow, and known times when traded counter to, but of one thing I don't want to do is go against a seemingly important statistical factor.  As well, after the initial decline of futures, prices went range bound instead of rallying.  This leads me to believe that futures are marking time in expectation of a lower cash market. Basis remains exceptionally wide and holds additional risks over and above normal fluctuation.  Knowledge is everything, and how the derivatives available to you work, and what marketing positions they will place you in, is crucial.  In using futures, risk is basis convergence with futures moving to cash and you lose the spread difference.  If cash falls to futures, you lose the premium of the cash.  Either way, you are going to lose the spread. In using a put option or an LRP policy, you are at risk the basis and the premium paid.  Hence the cash market would decline by the basis spread and the option premium before your downside protection would be in the money.  Loss of cash price to put option or policy strike, minus premium is the spread you are at risk of losing.  In using a combination of an at the money put, and selling a $10.00 out of the money call would decrease the width of basis, and allow for futures to climb to the short call strike price with no realized loss, only unrealized at that time.  Above the short call strike price and it is dollar for dollar.  These are examples of what is available to you and briefly discuss the risks and rewards.  As knowledge is power, I highly recommend you spend this weekend learning about basis and ways that hedging strategies can help you manage price risk.  Be sure to understand the amount of working capital it takes to hedge, over and above all the other input costs that are dwindling your working capital.  

I have read a number of books on trading and even attended classes on the psychology behind what makes traders buy and sell. When coupling findings from knowledge of others with the Elliott Wave Theory, I think it possible the cattle market has put in a long-term top.  I believe that if you want to bid this high, and assume this risk, there is no one to stop you.  However, that does not necessarily suggest you will succeed.  As well, your intentions may have absolutely no impact on the market because there are more factors at play than a shortage of cattle.  With a belief that sentiment reached new highs, at new historical high prices, with exceptionally bullish fundamentals of shorter supplies, it does have a great deal of aspects that would suggest a top.  With a belief that Wal-Mart now controls 24% of the cattle on feed, and the beef/dairy cross having risen to 18%, that leaves approximately 52% of inventory available to the open market.  When considering there are others with vertically integrated ties, some percentage of that is wrapped up as well.  As expected, 2024 made great headway in strengthening lines of vertical integration and increased beef production.  This leads me to believe as well that the last rally consisted of the few remaining cattlemen, outside vertical integration, attempting to remain in the business.  However wrong I may be, an expected 10% to 25% decline in price will expose more details on this. 

With the advent of a potential cease of the Russian/Ukraine war, I am no longer bullish energy prices.  While this factor may not cause a price decline, it lessens the aspects of higher, especially with a belief consumer demand is weakening on all fronts.  Wars are bullish grains and energy and the ceasing of may be bearish.  Friday's rally in corn appears as the wave 5 materializing.  I recommend farmers pay close attention to this with expectations to market old and new crop corn were targets of $5.35 July, and or $4.90 December to be met. This is a sales solicitation.  Wheat bolstered as threats of Russia dumping wheat on world markets has subsided.  The US wheat crop looks good and India's drought is still on the front burner. While I do not recommend selling wheat futures or buying put options, I do recommend some cash sales with this most recent run up in price.  November beans were able to push a little higher today.  This is believed the weaker market over corn and wheat.  A trade of November beans under $10.40 would lead me to believe a bear market is resuming.  Bonds were exceptionally volatile this week as the US government has to borrow money to pay the interest on their own debt. 

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.