“Shootin’ The Bull”

End of Day Market Recap

by Christopher Swift

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2/22/2024

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Live Cattle:

Futures traders are believed to have taken some profit.  The slow growth of open interest doesn't suggest a great deal of interest in this market.  Especially after a $23.80 rally, producing a price rarely, if ever traded in the cash markets.  I believe those who are at risk cattle price fluctuation have already made their move, whether hedged with futures or options, or nothing at all.  If so, this reduces the amount of selling pressure, allowing those who wish to buy, less resistance.  Hence, how you get the dollar move in less than a minute.  With marketing decisions made, time is needed for convergence of basis.  With last weeks cash trade at $180.00 and April futures at over $189.00 this morning, that is a great deal of premium in the fat futures to work with.  I think cattle are stacked up in feed yards and although have lost some pounds from the storm, remain above last year, with expectations to increase again.  The cattle futures are asking a great deal from producers, packers, and the consumer to maintain, if not increase, consumption and willingness to pay a higher price.  With this latest bout of inflation on hand, it is possible we are asking a little too much.  Again, the structure appears to be that producers that are managing risk offer little resistance to the buying.  The futures markets were created for the intent to buy or sell commodities today, for future delivery at prices that may or may not be available in the future. That is today's objective, selling cattle in the future at a higher price than can be established today.  As that comes with stipulations of having to pay any difference, margin requirements, be prepared to meet the margin calls or get a lender involved so they can meet the margin calls.   

A new high in the spread between March feeders and August fats.  The contract high width is $77.60 and closed today at $70.70.  Last year, the spread at expiration of the March contract was $31.91.  It is more than double this year. At the expiration of the March '23, August '23 fats gained $22.90 by expiration to produce a profit per head in mid-August of $229.89.  This year, the spread is double starting out.  At $1.05 pound per gain, a need of $194.00 August to break even, or a cost of gain down to $.74. This suggests futures traders need to push August fats $2.00 above current contract high, or $13.00 more than at today's close.  As you can see, a great deal of change is needed in one or the other, or a lot of changes in all.  

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Feeder Cattle:

Margin calls can be a sign of being in a wrong position.  In the case of the speculator, it is just that.  To a hedger, it actually means you have a better chance of securing a higher price for your inventory than not.  If you are meeting margin calls, it increases the odds you will be able to achieve full convergence of basis at the time of physical sale.  If your futures account is starting to profit, it suggests you will be taking the minimum sale price instead of maximum.  Therefore, be careful what you wish for.  You want full convergence of basis at the top, not the bottom.  It's going to take place, so why not the high end instead of the low end.   Change your mindset from, I'm losing on the futures to, I'm gaining on the cash with a potential to secure the entire basis spread. It's all about being able to live with the consequences of your marketing decision.  The $10.00 to $27.00 premium futures are offering, plus any advantage gained from an options strategy, is believed to make those decisions more palatable, regardless of outcome.  

Expectations of feeder cattle futures price suggests even greater expectations for the consumer.  It leads me to believe the consumer will be able to overcome current stagflation, and the current bumbling administration, to increase consumption and willingness to pay a higher price.  That is encouraging. While I wish to be that optimistic, I think the US economy is on thin ice with a Fed bound and determined to quell inflation, while the current administration fuels it.   

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The fence options hedge strategy I recommend consists of buying an at the money put and selling an out of the money call.  The two strikes put a "fence" around the price you will collect.  You are going to receive one of the two prices, or somewhere in-between if carried to fruition of the futures contract and you market the physical inventory at the same time.  Due to the short call, the position is margined the same as a futures contract with unlimited loss potential materializing above the short call strike price and unlimited profit potential materializing below the long put strike price. The margin requirement is due at the onset of the position and will be maintained regardless of whether the position is in the money or out of the money.  Margins can change dramatically within the spread, causing unrealized losses to accrue, even though may or may not ever be realized.  At expiration though, only the difference between the short call strike price and the underlying futures becomes a realized loss.  The margin requirements during the interim remain in your account.  Understand the derivative you are working with.  If you don't call me and I will teach you.   

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Hogs:

Hogs were higher.  I remain wrong.   

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Corn:

If you have old crop corn to market, consider making a timed sale in correlation with the expiration of the options on futures contracts.  The May options expire April the 26th.  If you make a decision to market some bushels on April the 26th, then consider selling the May $4.40 call and collect $.07&1/2. Now, on April the 26th, if May corn is above $4.40, you have sold corn for $.28&1/4 higher than today.  If corn is under $4.40, you have the option to market corn at whatever the price, plus the premium, or continue to store and you have collected the premium.  Do the same thing for July and September and sell the call strike price at the level you wish to market corn.  You are going to sell corn at the short call level, or collect the premium.  This is an example of a sales solicitation I recommend for corn farmers needing to market corn. 

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If you are needing or wanting to sell new crop, but scared to death of missing out on a rally, then buy the call option you want to sell beans.  If that strike is reached, you will have gained premium on the call option and achieved the selling price you wished for.  As well, you can still be long the market and not fret about missing out as you own an at the money option.  There are things to do and ways to do them.  Your worse case scenario is not being able to live with your marketing decisions.  

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Energy:

Energy was higher today and has me spooked.  Again, information garnered while in Chicago concerning energy has been wrong so far.  As well, the wave count is being negated in the crude with the higher trading.  Hyper volatility the past several days is anticipated to culminate into a trend. Whereas I believed the trend would be lower, I have reservations at the moment.  Regardless, if you need fuel for this springs planting, did nothing during last fall when I thought it was going to go higher, then diesel is about $.20 lower on the futures market and may have some impact on farm fuel.  Since fuel is a necessity, consider booking it while at the lower end of the range. This is a sales solicitation.  If you can use 42,000 gallons, buy a call option.  This is a sales solicitation.   

Bonds:

Bonds pushed low enough to elect stops at 117'20 from a prior recommendation.  This puts me back flat of bonds with still an itch to be long.  Unfortunately, with the aspects of fuel higher and the current administration fanning the flames of inflation,  the wave 2 may continue to unfold.  As much as I doubt a new contract low, it is possible if the Fed becomes more aggressive and the administration comes out with more money printing. While US citizens may not necessarily be in the true definition of serfdom, but try not paying your taxes on anything you think you own. You will find out quickly, you own little that can't be taxed again and again, or removed from you.    

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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.