Comments from the cow side on nothing in particular...

Discussion in 'Commodity Futures' started by Overnight, Jan 19, 2021.

  1. Overnight

    Overnight

    ...But in this weekly episode, it's all about corn. They F you at the drive-thru! As if we needed any reason for steak prices to go higher, they found another one! Gouging I tell you.


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    THE GAME CHANGER

    "No year passes without ups and downs in feed prices. These are generally caused by price signals from supply or demand changes intended to cause a market response. Corn is a commodity with lots of depth because of its size and the various uses. The market is very liquid and enjoys broad participation from a large pool of commercial and speculative traders. The shock to markets from the recent skyrocketing prices will have broad implications reaching far beyond CME futures.

    Cattle operations depend on corn and corn by products for the lion’s share of their feed needs. Most feedyards acquire corn through an agreed “basis” to corn futures market then, price the corn at will. Basis levels this year in the southern plains have been especially high due to drought and reduced acres that have moved to cotton. Corn is the major component of feed rations and the overwhelming determinative factor is cost of gain for cattle.

    Corn prices have moved from $3.40/bushel in August to near $5.40/bushel currently. The increase has been driven by several factors including heavy buying by the Chinese, threats to the South American crop, inflation speculation, and most recently a dramatic reduction in domestic supplies caused by a USDA report dropping last year’s corn yields by 3.8 bushels – the third largest reduction in reporting history. The impact will be a game changer for all meats.

    Cattle operations will encounter significant changes. First and foremost, will be the rise in cost of each pound added to the weight of the animal in the feedyard and to a less extent on pasture through supplemental feed. Close outs in the $.70s and $.80s on cost of gain will quickly move to well over a dollar. Incremental pounds during the final phase of finishing will reach $1.25-$1.50/pound gained. This will encourage the placement of heavier cattle leaving lighter cattle for grow yards or grazing where less grain is used and forage cost are lower.

    Marketing plans for cattle from the feedyard will change. A tug of war will develop between cattle owners interested in pushing cattle to market rather than suffer economic losses by adding more weight, and processors who need more weight and time on feed to reach the desired quality grades. Processors will need to provide sufficient premiums to attract more cattle into the heavier high grading categories. The choice/select spreads should widen to encourage longer feeding periods. Placement patterns also will change as less cattle are fed in the corn belt with some farmers choosing to sell corn rather than market it through cattle.

    Ultimately, higher prices for corn will incentivize farmers to allocate more acres to corn. Cotton gins will be disappointed this coming crop year as farmers on the southern plains switch from cotton to corn or milo. The anticipated increase in corn acres will cause new crop corn futures to fall and create a negative carry in the current corn in inventory at grain elevators and on farm storage. The prospect of lower prices in the future will encourage more farmers to sell now and those pressures will lower the corn “basis”. The combination of inflation pressures and high feed costs will make it likely that all meat prices are due to rise."
     
  2. VicBee

    VicBee

    And I thought life was simple! Really enjoy reading these detailed analyses of things I know little about. They give you a perspective on the various interests involved in the game.
    I've got friends working in the lab meat industry who are vying for a peace of that action...
     
  3. maxinger

    maxinger

    Corn futures have been going up since Aug 2020.
    price has almost doubled.
    But volatility was not that high.

    Corn price has been most volatile between 2006 to 2014.
     
  4. Overnight

    Overnight

    This week's weekly blurb made me think of GameStop! Hehe!

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    THE DISCONNECT

    "Cattle owners watched as packers easily acquired cattle at $110 while futures battled higher, most trading days of this past week, to close at $116.50. The February basis was over $6 with little over a week until we enter the delivery month. Hedged operators waited this past week until late week, hoping for convergence, to cover positions on the board but found each day contributed to a wider negative basis. April futures only two months away carried a $12 cwt. premium to today's cash.

    Cattle owners of inventory outside feedlots shared the same experience. Hedged feeder operators offered cattle for sale only to find cash bids dollars under the futures. The daily index of feeder prices was $133 against a $137 January board price and the January contract will expire next week.

    Those operating in this environment were scratching their heads as they put the numbers together and make plans for the future. Purchasers of feeder cattle penciled out forecasts of large feeding losses after assigning current grain cost and forward futures prices. Stocker operators were losing faith in the reliability of a hedge given the poor basis of cattle when they need to sell.

    Assigning responsibility for the disconnect between futures and the cash trade was not difficult. Investment dollars were flowing into cattle futures from those players with little knowledge of cattle but broad fundamental theories of the economic certainty of inflation. Government spending, low interest rates, and high feed cost create the perfect profile for certain inflation with food and the meats as a perfect playing field for speculation on this phenomena.

    No market is more vulnerable to this type of investment anomoly than the cattle market. The chump change of large investment funds can easily move the cattle markets. The poor liquidity in both live cattle and feeder contracts exposes both a weakness and a flaw in the contract construction. Outside money can push prices far beyond fundamental value and distort the relationship to the underlying physical commodity."
     
  5. Overnight

    Overnight

    Rare addendum on the weekly report!

    It seems a bit political, but is relevant for San Fran shoppers...

    "NOTES FROM ALL OVER

    San Francisco never ceases to amaze the world and provide a parody of itself and a caricachure of liberalism run amuk. San Francisco shocked the meat world by passing a city ordinance signed into law requiring some grocery stores that do business in the city to report which antibiotics are used each animal providing the raw meat they sell. This, of course, would be virtually impossible to provide, and assured less meat and more fraud. This week they exceeded their own lunacy when the School Board voted 6-1 to rename 44 San Francisco schools including names like George Washington, Abraham Lincoln, Thomas Jefferson, Paul Revere, Robert Luis Stevenson and Francis Scott Keys. The Board insisted the city rid itself of those who engage in subjugation of human beings, oppress women, or those who otherwise significantly diminish the opportunities of those among us to life, liberty, and the pursuit of happiness. Both San Francisco's liberal Mayor and the local newspaper lashed out against the vote asking the Board to "bring some urgency and focus to getting our kids back in the classroom and table the need for renaming."
     
  6. VicBee

    VicBee

    FYI, it's not San Fran, it's not Frisco. It's The City if you're local or San Francisco if you're not. You can say City by the Bay, if you're feeling poetic.
    At least they don't have open carry laws, they have safe and free clinics where women can decide to have an abortion or not, they have an incredible diversity of people, and real estate prices and rentals are among the highest in the country, a sure supply and demand demonstration that more people want to live there than leave there, despite the quirky and the sometimes ridiculous and the way too dirty streets of a city that remains a beacon of liberalism.
     
  7. Overnight

    Overnight


    Sorry, I'll correct my post...

    "...Rare addendum on the weekly report!

    It seems a bit political, but is relevant for San Francisco shoppers...

    "NOTES FROM ALL OVER

    San Francisco never ceases to amaze the world and provide a parody of itself and a caricachure of liberalism run amuk. San Francisco shocked the meat world by passing a city ordinance signed into law requiring some grocery stores that do business in the city to report which antibiotics are used each animal providing the raw meat they sell. This, of course, would be virtually impossible to provide, and assured less meat and more fraud. This week they exceeded their own lunacy when the School Board voted 6-1 to rename 44 San Francisco schools including names like George Washington, Abraham Lincoln, Thomas Jefferson, Paul Revere, Robert Luis Stevenson and Francis Scott Keys. The Board insisted the city rid itself of those who engage in subjugation of human beings, oppress women, or those who otherwise significantly diminish the opportunities of those among us to life, liberty, and the pursuit of happiness. Both San Francisco's liberal Mayor and the local newspaper lashed out against the vote asking the Board to "bring some urgency and focus to getting our kids back in the classroom and table the need for renaming." "


    There. Is that better?
     
    VicBee likes this.
  8. Overnight

    Overnight

    In this week's weekly blurb, they turn their attention to the Reddit deal. Was wondering when that was coming. And it contains a veiled "be careful" threat for all those n00bs who think they can "squeeze" cattle. Ouch!

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    THE RETAIL FUTURES TRADER

    The grouping of those engaging in cattle futures positions is fairly well known. Probably the largest group is the commercial hedgers who are protecting positions they have in the cash trade for cattle and beef. Next would be the index funds, protecting large companies from inflationary threats in the economy. You then have managed futures traders who try to outguess the market and finally individuals trying to do the same.

    Now there appears to enter a new generation of individual traders, wired to social media, and often fearless in their strategies and positions. Many are reckless and proceed with little analysis either from charts or fundamentals. More often than not they get their triggers from a forum in Reddit or a text message and they tend to follow web influencers who mainly focus on momentum of a certain stock or commodity.

    The stock market is opening an investigation of this group of traders seeking by some to protect them -- in spite of the fact they have the money and desire to put it at risk. Busy Bodies like Elizabeth Warren want to protect them from themselves so they are not harmed by making the wrong choice when coming face to face with hedge fund titans.

    They have operated often in unison and overwhelmed hedge fund positions in stocks like GameStop where quotes often track prices that can range several hundred dollars a share on a $50 stock. Trading has moved from stock to stock but always characterized by momentum trades and volatility leading to market moves that seem unstoppable.

    Some now see these same 20 and 30 year old traders moving into commodities. Some analysts suspect these young traders as being part of the force behind heavy buying in corn and soybeans. Indiscriminate buying has always had its outsized risks and none more than commodity trading. Some wonder if maybe cattle will be next. The notion that government officials should be in charge of protecting young inexperienced traders is wrongheaded. They will learn as we all must.
     
  9. Overnight

    Overnight

    This week's blurb is an interesting read on the cold snap now hitting the middle of the country...

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    "Always a wildcard in any agricultural operation is the weather. While forecasts continue to improve and 3-5 day forecasts often accurately pinpoint weather patterns, more long term forecasts can change on a dime, and those changes often surprise and change the economic landscape for agriculture production. Farm crops require moisture to grow and most weather events for crops center around moisture patterns. Cattle production involves, for the most part, animals outside exposed to the elements and no elements deliver a more severe blow than winter storms.

    The disruptions begin with impacts on cattle performance both inside and outside feedyards. Severe temperature declines change the body metabolism and more feed is required for maintenance leaving less for gain. This simplistic analysis explains gain declines and frequent weight losses. It is the combination of frigid temperatures, with snow and wind, when the outcomes become more serious and sometimes disastrous.

    Most of the plains, both northern and southern, will suffer temperature lows not seen for decades. Parts of the area will experience wind, snow, or sleet during the impact period lasting several days. These impacts will disrupt both livestock operations at the production site but also transportation between sites. Many auction barns will close and beef plants will find transportation impaired causing smaller slaughter volumes. Beef sales will find trouble with delivery schedules and some consumer buying patterns will be changed. The web has delivered tools for tracking weather events and those include highway webcams. May states now provide a map showing all highway conditions via webcams that allow anyone to click and observe real time weather.

    Piecing all the impacts together is difficult and the overall economic damage is sometimes not known for many days after the event has run its course. Sometimes determining cattle performance impacts will play out over the entire feeding period. Transportation problems are normally corrected in a matter of days. Larger death losses from storms are often underreported and blizzard conditions can sometimes scatter cattle miles away from their homes.

    The one factor that is unchanging is the fact that people continue to eat. Eating patterns may change but overall consumption of beef should not be seriously harmed. Transportation problems may cause price spikes to correct shortages in an area. The overview for beef production is less pounds are produced during the extreme weather events. Balancing the financial impacts to the bottom line will differ from operation to operation and sometime be dependent on risk positions. Unhedged producers can sometimes recover some of their production losses through higher prices while hedged operators are unable to compensate."
     
  10. Overnight

    Overnight

    This week's blurb seems to be the conclusion of last week's severe winter weather event in the midsection...

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    "Every beef producer regrets lost beef sales. A consumer travels to the store, navigates to the meat counter, then finds no beef available for purchase. The consumer examines the other options available. In some instances there are no meats available or only a few meat options. The consumer's exit from the supermarket represents a lost beef sale. Most of those lost sales are never regained and represent an undesirable change in the supply/demand balance sheet.

    Stocking and logistic problems in the food supply chain are not all lost sales. Sometimes, especially during power outages, food spoils. Extended periods without power causes food to get out of condition and forces spoilage. This food must be thrown out. Certainly across the south this occurred in homes, restaurants, and supermarkets. Some of the food may be salvaged but much will not.

    Restocking is sometimes slow to develop and gauging consumer demand post weather event is difficult. Eating habits change during the weather event and people are anxious to return to more familiar fare once the weather clears, and winging it for food is left behind. Sometimes this can cause more eating out post storm, and sometimes more carefully planned "eat at home" dining. Computers are tracking supply chain shortages and adjusting on the fly new orders and delivery dates.

    The production side of the beef business is also challenging to measure and determine the impacts to the supply/demand curve. Beef plants will return to normal operations this coming week but over 100,000 head of fed cattle have failed to be harvested in the interim. The big picture problem for beef processing is the oft repeated issue of under-capacity in beef processing. Most businesses would quickly respond to under-supply by running extra hours in the existing plants. The beef plants have been running at capacity all the time, enjoying record breaking profits, but have failed to build new plants.

    The brunt of the harm will fall to the nation's beef producers who will suffer production losses of millions of lost pounds of gain on cattle. Two week's of high priced feed will have resulted in negative weight losses in many of the nation's feedyards and outside cattle will have suffered outsized death losses and weight losses. These losses are not immediately measured by computer tracking systems but will be realized over the feeding cycle in the storm premium to the cost of gain."


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    And then I noticed something interesting in a daily blurb...

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    "Packers will be competing for a much smaller number of offerings this week. Finishing yards are reporting substantial weight losses and matching those weight losses against the lost tonnage from plant slowdowns will be determative of the market price. Many south Texas, Louisana, and Mississippi supermarkets have yet to restore depleted meat counters. Cattle owners will be asking sharply higher prices as the February spot futures contract expires this week and April is trading at large premiums to cash.

    The slaughter this past week was 552,000 with the previous week at 608,000 head. Those numbers were well under last year for the second week in a row. From south Texas to the the northern areas of the country, warmer temperatures are rising above freezing, but the lingering effects of the cold spell will hang around for weeks. For some cattle operations this will mean mud and melting. For all it will be a welcomed relief from record breaking cold that has plagued the mid section of the country. Food stores in the south will be restocking supplies as power supplies return to homes and businesses....

    Box prices firmed in early week trading. Depleted inventories will keep a firm undertone on the box prices. The past year has been an anomaly for food markets. Runs on food supplies during the pandemic, then during the recent cold spell, left many stores assessing how the logistics of their operations serve their needs. Many of the largest grocers work from distribution centers adding an extra leg to the transportation matrix. Some beef processors have built new facilities designed to fabricate and deliver directly to stores making distribution centers unnecessary. The challenges of the pandemic and cold spell emphasize the importance of food logistics in delivering supplies quickly to consumers during unexpected interruptions."


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    Does this mean we will see April prices starting to fall as we roll from Feb to April? Hmmm!
     
    #10     Feb 23, 2021