"Shootin' The Bull" Weekly Analysis...

For the week ending July 15, 2022

In my opinion, deep pockets showed up to the big video sales this week.  Participants in retail meat sales are believed to have been on the forefront of this buying frenzy in an attempt to jockey for position at the vertically integrated supply chain table. End meat retailers cannot raise and lower prices to the consumer as quickly as they wholesalers can to the retailers.  Hence at times, they are forced to reduce margin or raise prices to their customer.  As none want to disgruntle the consumer, they tend to eat the margin lost.  In an attempt to own more inventory, meat sellers are believed now entering into agreements that will reenforce their supply chain.  Going forward, were prices to continue to climb, they already have a portion of inventory purchased at the lower price.  If prices move lower, they are able to reduce the average paid for the initial inventory.  If higher, they will use earlier purchased inventory to average the price.  So, what we have now wound up with is a backgrounder flush with cash and a cattle feeder/meat seller, in the throes of paying a very high price for incoming inventory and potentially further price increases of inputs. All at a time when cows are coming to market on U-Haul trailers and the consumer unwilling to pay more or consume more. Today, those cattle feeders are faced with a predicament that is out of their control.  That being, if the packer decides to facilitate the size slaughter pace needed to keep fed cattle current and cows from dying outside the packing plant, they would then flood the beef market and kill their margin for potentially the remainder of the year.  At that point, they would have no incentive to bid higher for cattle.  Or, they could choose to not facilitate the slaughter, and cattle in general would back up as there is not believed enough cow slaughter capacity to get through the numbers in a timely manner needed.  Either way, numbers are anticipated to impact slaughter rates to the detriment of the producer.  On Friday, I made recommendations to sell August live cattle for just this reason.  This was a sales solicitation.  Whether right or wrong, it is purely speculative and based solely on the current factors of cattle liquidation.  Note the large decline in open interest this week on the rally.  This leads me to believe it was short covering and not humans going long.  Shorts smelled the rally and exited, and maybe a few anxious longs jumped in.  Going forward, I would anticipate the shorts to start reapplying their position and the anxious longs to sell. 

Backgrounders have seen the expectations they have conveyed to me over the week with the video sales. Now what? One has to consider how long the "Daddy Warbucks" at present will continue to bid this high?  My expectations are that the deep pockets have their fill of inventory at the moment and potentially have achieved a couple of things that will happen going forward.  One, the outrageous price paid for incoming inventory is such that some were unable to participate.  This starts to work on the financially weaker producers.  Next, there will be some that want to have a seat at the VI table, but overextended themselves against the deep pockets, leaving them vulnerable to a price crash.  Which seems to be the next thing to take place.  That being, the market goes down and exposes the weaker producers that participated in the rally of feeder cattle.  That may take the rest of this year.  Then, starting next year, the lines of vertical integration should be well oiled and working to reduce the volatility associated with commodity production. All about the time we begin to see expansion take hundreds of thousands of cows and heifers held back for breeding.  The remainder of this year is believed going to be a fight between those that believe expansion can start and those that believe it can't yet.  I am of the opinion the industry cannot expand anytime this year.  This leads me to anticipate a trend lower in both fats and feeders.

Volatility in corn is ferocious.  Cattle feeders have just increased their financial outlay by 12% to 20% if having purchased inventory at most anytime this week.  Since none of those animals will breakeven at any price via the futures premium, compounding the problem with increasing input costs will be the demise for some.  I recommend cattle feeders do everything possible to secure the $2.00 break in corn prices over the past three weeks.  With USDA's last WASDE assessment, it leads me to believe that the 177 bpa won't be increased, and most likely decreased, with no chance of additional acres due to a belief that more acres will be chopped for silage this year than last. If this year falls short of last, and we saw this year's July close a nickel under $7.00, what will next July look like?  Not only that, the drought in various regions will cause basis to widen significantly.  I would urge producers to consider this and work towards creating basis contracts.  Being hedged the board, and it going up ten cents and basis twenty, keeps you working backwards. Beans look as if they may have bottomed as well.  Although bean oil continues to be weak, the meal has been surprisingly strong at this price level. 

I have reversed my position on energy prices.  I no longer believe that this administration can do anything that would encourage production or decrease demand.  Therefore, only rising prices are believed able to squelch demand, but still may not encourage demand. This administration is not friendly towards oil and not towards the Saudi's.  So, why should we believe that anything stated will lower oil prices.  I believe that oil declined on a number of factors recently, but most likely, just some simple profit taking and not quite ready to send it screaming higher yet.  I anticipate energy to trade higher and recommend you top of farm tanks sooner, than later.  This is a sales solicitation.  Bonds have begun trading in a range.  Threats of another 3/4 of a percent rate hike is keeping bond prices volatile, but in a range.  The yield curve has been worked on this week.  Tweaking the short end and long end to keep from crashing the economy.  With equities appearing to be in a down trend, and this administration still flailing around, I don't see any sort of conclusion that would lead me to believe inflation is over. 

Christopher B. Swift is a commodity broker and consultant with Swift Trading Company in Nashville, TN. Mr. Swift authors the daily commentaries "mid day cattle comment" and "Shootin' the Bull" commentary found on his website @ www.shootinthebull.com
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 their 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.