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“Shootin’ The Bull”
Commodity Market Comments
by Christopher B. Swift
January 18, 2018
The news of the sale of JBS to Pinnacle Asset Management lifts a prolonged stigmatism from the industry and produces a firm undertone to the market. Now that we know JBS won’t be broken into pieces will further reduce the likelihood of going into a bear market environment. It has been noted over the months of JBS buyers having been inactive or tepid at sales. This may have been to help the sale of the company. Believing they will want to run at 100% capacity, we could see feeders benefit the most from this transaction. Bears are running out of excuses for supply to overwhelm demand. While I do not believe the JBS issue was on the forefront of their analysis, it is clearly not a negative factor to the market. Today’s price action leads me to anticipate a thrust higher tomorrow. Shorts have received no reprieve from the buying as stair steps up doesn’t allow for the “when it pulls back I’ll get out” mentality to work. Today was just buyers absorbing the selling. Friday, I would anticipate longs to extend their positions, especially if cash trades higher, and shorts feeling too uncomfortable to sit through the weekend. There are so many more articles now being written about the demand, that it just makes it more difficult to believe supply will swamp it. Box prices were slightly higher, but another larger load of 95 today is of significant interest. The more loads, the more likely it is export business.
On the mid day cattle comment, I made the recommendation to buy any feeder cattle contract month, except January, and place a sell stop to exit only at the low of January 17ths low per respective contract month. ***This is a sales solicitation.***
Feeder cattle producers have received a blessing. First, if JBS begins to run at 100% capacity, they will more likely than not need more inventory. Second, the dramatic basis change has swapped horses from being exceptionally good to feed yards to nearly detrimental, while making a more favorable environment for the back grounder. Let me preach on it. Only 9 days ago, a feed yard could have bought feeder cattle in the March, April, May time frame for as much as $13.00 less than at the current price on that day. Even if a conservative approach was made, the purchase of a call option could have secured half of that basis. Today, the feed yard is buying feeders at a slightly elevated level and an exceptionally elevated level in the future. Since the lowest price for feeder cattle now is today, it should help to promote more physical demand. Flip over to the backgrounder. For 9 months they have been having to sell product on the spot market to garner the highest price. Hedging tended to increase risk due to the basis plus volatile price movement. Previously, were a backgrounder nervous and needing to sell inventory, he would do so then and potentially at a lighter weight. Today, were the backgrounder nervous, he can sell the March board for $.83 more than current cash and put on additional weight to the March sale date. This dramatic of a basis swing, and moving after 9 months from positive to negative, has to be implemented into everyone’s analysis. I would anticipate the negative basis to stay for some time to come. Recall that most all of ’13 and ’14 ran at a sharply negative basis. I believe this is a fundamental change. All technical indicators were higher today. I anticipate a thrust higher on Friday. The large trading range on Wednesday, followed by today’s narrow one, leads me to anticipate significant short covering and a robust desire to own feeder cattle inventory.
Crude was soft today, but saw both sides of unchanged through the day. I probably wouldn’t go out now to fill up farm tanks. A break lower may only be a correction, but it could be a healthy $.20 to $.30 move lower near where the first recommendations were made. Fuel for this springs planting may be more important so let this shake out for another day or two to see if there isn’t some price retracement.
S & P 500 Stock Index:
Bonds are establishing a down trend channel. Lower bond prices directly correlates to higher interest rates. I anticipate this trend channel to develop further. Therefore, I anticipate the price of money to go up.
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