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Live Cattle

In my opinion, the end of the year window dressing is upon us.  As the abbreviated trading weeks start, fewer traders will be around.  As I’ve seen nothing yet to change my analysis, traders continue to pressure futures in anticipation of a change in consumption.  I don’t see this change coming.  I do see the increase of inventory and believe that the drought will now have to be dealt with.  These two factors don’t necessarily negate the strong demand, but will most likely just keep the volatility high.  There were two declines of significance this past summer.  At those lows, market action was exceptionally volatile and produced a wide price range.  I view those in hopes of drawing conclusions to the current low.  As I write this the developing bottom is taking on similar aspects as to the summer lows.  I recommend to anticipate this current low to unfold similarly to the summer lows.  Were this to play out as anticipated, it would wind up being a simple marking of time.  Interestingly enough, it would also have similar aspects to the fundamentals.  Those being the anticipation of demand being offset by greater numbers and causing a price decline of significance.  What has been the case though is that cash did not follow the futures lower and ended up the futures had to race to get back to the cash levels.  I think the same scenario will play out at this current decline low.  Why? Demand.  As the US continues to increase employment, disposable income rises and discretionary spending increases.  This is more true to the smaller aspects of life than the larger purchases of homes and automobiles.  Then, there remains the export business. It remains robust with Japan still leading in consumption.   Japanese manufacturing hit an 11 year high in optimism due to increasing global demand.  This is interesting as it has led to speculation that  Bank of Japan Governor Kuroda may begin to reverse their easing policy.  No, this won’t have an impact on US beef per se, but what it does suggest is that it reduces the likelihood of Japan slowing current beef consumption.  Back in the US, I can see meat salesmen sharpening their pencils to push as much product into the first quarter as possible.  The large volumes of available meat makes for greater volume sales and therefore increased commissions.  Although most know that beef production won’t subside totally until the end of ’18, but the increase of inventory in ’17 didn’t appear to make much difference as the consumer spoke volumes through their discretionary purchases.

Feeder Cattle

The drought is increasing.  On this weeks Palmer Drought Index, all areas increased in severity through either a widening of the area or intensity of the dryness.  This has impacted stocker cattle that should have remained on the wheat pasture until end of winter.  There is a portion being moved to rented land while the other portion is marketed once again.  There are a multitude of opinions on what this may or may not do to the price.  At this time, with the farmer feeder seemingly aggressive to own inventory, the industry may skate through this without too much difficulty.  The lower feed costs to farmer feeders allows them to bid higher for inventory.  Whether due to proximity to an ethanol plant or ownership of feed, cost of gains is just enough to have them as strong bidders.  Like the fats, look at the two lows this summer and anticipate a similar bottom this time to those.  The excessively wide positive basis makes it very unattractive to hedge or make forward contracted sales.  Before years end, I would look for basis to narrow back towards even.  Since there has been little overly bullish news out front, an even basis may be about as good as it gets until after spring.  At this juncture, I anticipate the futures to push higher in closing the basis rather than the index moving lower.  At $10.00 positive, feed yards can capture a portion of this with call options. If my analysis turns out to be incorrect, then then 100% of the option premium is your risk and you buy inventory cheaper.  If correct, then you should capture a portion of the basis as well as you are long and benefiting from the long hedge.

Corn

Corn remains lifeless, but there is trouble brewing with this drought.  Most likely making wheat the most susceptible at this time, but could easily bleed over into corn and beans this spring.  The wheat pastures are drying up.  Were the stocks to be any less burdensome and I would have anticipated at least a $.30 to $.50 rally out of wheat.  They are burdensome though and this has kept a lid on buying.  That may not last too long though due to the current severity and increase of.  Lastly, I anticipate a resumption of the down trend in the US dollar.  While the previous weakness this year has had no impact on the grain markets yet, combined with a drought, it could quickly.  Throw into the mix of rising energy costs and it appears that demand for most everything is increasing.

Closing Comments

Being a commodity broker introduces me to all aspects of agricultural production.  Crop insurance is one of those aspects and it has been a pleasure watching my son excel in this field.  Although Swift Trading Company is not associated with C & H Insurance, I have no reservation recommending Will’s expertise and the services he provides.
C & H Insurance Commitment
With the recent changes made in crop insurance programs, C&H Insurance is even more determined to provide outstanding service to its clients.  Keeping abreast of the ever changing and challenging agricultural environment, we attempt to expose risk and capitalize on opportunities.  The personal services provided by Will Swift at C & H Insurance are listed below:
  1. Help determine the level of coverage and type of insurance plan by:
  • Analyzing your current financial situation and taking current breakeven goals into consideration
  • Analyzing your current marketing plan. This includes, your current positions, future sale goals, and how potential market changes will affect your marketing plan.  Then we make the extra effort to make sure the insurance plan you choose now will still be the right choice at harvest.
  • Analyzing land locations to determine what the best unit structure would be for that current year and where your greatest risk lies.
  1. Mapping of your planted acres and record keeping in book form.
Products offered to C&H clients include:
  1. Catastrophic insurance
  2. Yield Protection
  3. Revenue Protection
  4. Revenue Protection Harvest Price Exclusion
  5. Group Risk Protection Plan
  6. Hail & Fire Insurance
  7. Livestock Risk Protection
  8. Livestock Gross Margin
  9. Pasture Range and Forage
To discuss your crop insurance options for the upcoming season, please contact Will Swift at 573-472-9948 or email William@cropNhail.com .
I look forward to earning your business.
Will Swift