“Shootin’ The Bull”

End of Week Market Recap

by Christopher B. Swift

​5/5/2025

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Live Cattle:

Cattle feeders can't catch a break.  Split between making historical profits today, while potentially laying in inventory that could well produce historical losses, the cattle feeder continues with a plight that few envy.  Futures traders have never been as unfriendly as they are at the moment to cattle feeders.  The exceptionally wide positive basis in fats, and even to negative basis in feeders, forces the cattle feeder to buy the most expensive inventory and assuming risk of a severely discounted finished product.  As this has no bearing on foresight of a higher or lower price for cattle, it simply reflects how excessive the risk is to produce a pound of beef. 

The tiger trap is as deep as I have seen this year in the fat market.  Not only that, but every futures contract is trading at contract high.  Even if you sold contract high today, and it was "the" top of the market, there will be the loss from the cash high to the level of futures contracts before the hedge may become valuable to you. If looking to hedge October fats, placed this month, October futures are $11.00 to $15.00 discount to last established cash trade via north or south.  Long way around the barn, but it seems as if cattle have to continue to move higher, or else.  As I am hearing more and more that the cattle market "can't" go down, I lean even more heavily on making decisions with what is available over what may come to me in the future. Yes, buying put options on discounted futures contracts produces a very low minimum sale price in comparison to what is available today.  Even with the sale of a call option, the premium collected won't be enough to raise the minimum sale floor by enough to assume the basis risk.  So, don't sell the call option against a long put option when hedging fats.  This is a sales solicitation.  I do recommend buying the at the money put option on cattle you place.  Even though the basis spread is terrible, it is possible that cash prices exceed current contract high of futures when, or if, they begin to trade lower. 

Feeder Cattle:

Unlike cattle feeders, backgrounders have futures traders walking side by side with them.  What a difference in ability to manage risk between the two sectors.  The benefit alone of ability to hedge at an even basis is enormous when considering the alternative, like fats.  Here, you have a plethora of derivatives to work with that can produce minimum sale floors just a few dollars under the index and upside potential into the $300's were it to materialize. As well, cattle feeders are under excessive duress of capital expenditures, along with how to manage significant profits today and potential significant losses in the future.  As well, it is as likely that the consumer pulls the strings as it is the cattle feeder were prices to soften.  Beef demand is more than difficult to gauge, due to such low beef production.  Whether consumers will continue to consume at levels that will support current price, or impact beef demand negatively, some industry participants are already reflecting weaker second quarter outlooks.  

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Corn:

Further saber rattling between the US and China has produced a downdraft in grains.  I wrote earlier how surprised I was that beans have not been impacted any more than they were.  This sell off puts corn back to the levels around $4.50 July, where it has spent most of this year between that low and $5.00.  New crop corn was not as bad with some wet weather issues hindering planting.  Nonetheless, it appears a lot of field work was done last week with most corn and bean plantings well in line with last year and the averages.  With nothing but beef as a commodity hampering consumer inflation, a rally in commodities would not be unexpected or out of the ordinary.  For those who will replenish corn stocks in June or July, the ownership of the July call options will produce a predetermined price to help manage input costs.

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Energy:

Energy looks eerily as if it wants to resume the down trend.  If energy trades lower it will be a clue that the economy continues to suffer as consumers are not having to deal with excessive gasoline prices.  What has increased is utility bills, but not caused by the price of the commodity, but the infrastructure and maintenance to keep it coming to you. Again, another aspect of inflation that is not caused by a commodity.  As well, because there is little inflation in energy prices, they could inflate, and really cause some problems for the consumer. Again, like the corn, owning input costs at lower levels is expected to be of benefit were prices for cattle to move lower, or worse, input costs begin to rise abruptly.  

Bonds:

Bonds were lower today and believed resuming a down trend.  Inflation is not currently commodity driven, so any further decline in commodity prices should be of little notice to consumers.  A drop in beef prices would help tremendously.  As I continue to find more inflation of goods and services, outside the realm of commodities, I see no way for that to subside.  Insurance premiums of everything being insured are higher than ever.  Healthcare costs, commercial rents, HOA's fees for home owners and never forget those pesky taxes that just don't seem to ever go down, regardless of which administration is at the helm.  As this administration keeps attempting to reduce the amount of government spending, I find it difficult to see where new money will become available in the means of greater employment.  Most employer's seem to be cutting costs, rather than increasing them with labor.  ​

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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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