“Shootin’ The Bull”

by Christopher B. Swift

​5/22/2025

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Live Cattle:

More articles are being written about the plight of the cattle feeder.  Too much production capacity for too few of animals is now causing the rationing of producers.  Coupled with an egregious positive basis, and continuing to bid steady to higher for incoming inventory, cattle feeders continue to be paid handsomely at the moment for their outstanding assumption of risk. 

In a positive basis, the natural tendency would be for futures to move higher in the attempt to converge the basis.  Recall, futures settles to cash.  So, without a downturn in cash, futures would be expected to gravitate higher.  So, why the steep discounts if cash is $10.00 to $15.00 higher than most futures contract?  Skepticism of consumer resilience to continue to pay a sustained higher price without impacting demand is the primary reason, with the second being the transfer of risk from one to another.  Futures traders are more than willing to assume cattle feeders risk at a discount, but would be subjected to great potential of cattle feeders actually marketing inventory through futures contracts for which few are able to take delivery of. Especially commodity funds. Unlike the feeder cattle being cashed settled, in the fat market you will start paying the yardage and all other fees the second they are yours until they die.  Stating the obvious of the cattle feeders plight does not make the price go up or down.  What it enables you to do is see how fragile the cattle feeding industry is at the moment.  Phenomenal price gains have been seen that have curtailed losses and produced record profits.  Historically, we don't see such price gains, and with a great deal of feeder cattle purchases based upon today's price of fats, than in the time frame to be marketed, it suggests greater risks are being assumed.  

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Nonetheless, the situation is upon us where the industry is in a dramatic shift to gain market share.  Therefore, the struggles for some, and gains for others, will continue to ration the number of producers.  In my opinion, I won't be surprised by a packing plant shutting down for retooling or modernization, potentially some of the smaller farmer/feeder operations finding it more difficult to compete, especially if corn moves higher, or resilience of consumer demand finally begins to wane. These factors  won't surprise me any more than to see the cattle feeder continue in this agenda until market share desired is achieved and those achieved from are no longer bidding against you.  

Feeder Cattle:

​Backgrounders continue to have the best friend anyone could have at the moment.  That being, someone who will assume your risk at equal, or premium to, the underlying cash market. Backgrounders have their big event coming up in the next couple of months.  That being marketing in the summer video sales.  For some, these will the one or two sales a year they will make.  The importance of maintaining current price is crucial, especially when basis won't have the time to converge.  Therefore, even without a current basis risk, there remain price risk and the potential for a change in basis.  I recommend those who will market in the summer video sales to own the at the money August put.  This is a sales solicitation.  Do not sell calls and do not sell futures as you will not have time to converge basis if cash continues higher.  If owning the long put only, even if prices move higher the length of time remaining on the option, as well as delta of, will slow the erosion of the put premium.  Hence with as much price expanse as is being traded, the premium, or even loss of, is within a days price range of feeder cattle. 

Due to basis spread and close proximity to summer sales, this recommendation is likened to the bird in the hand worth two in the bush.  You know what can be done today, but unsure what lies tomorrow.  Cattle feeders will have to be even more aggressive than currently to keep this price up.  And then, don't forget of the things above that won't surprise me.  

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Corn:

 Corn was mixed, but made new high in the December contract.  Beans were higher and came to within a quarter cent of equaling Wednesday's high.  I expect grains to move higher.  

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Energy:

Energy was lower today, but not by much.  I expect energy to move higher.  ​​​

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Bonds:

Bonds made a new contract low this morning, and have since traded plus on the day.  It appears the down trend in bond prices have resumed, suggesting that every renewal or new line of credit will be more expensive.  ​

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 “This is intended to be or is in the nature of a solicitation.”  Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.

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