Haven't been watching these reports much this year, but just took a peek at what I think is last week's weekly blurb, and DAMN! ---------------------------- SIGNPOSTS OF CHANGE Turmoil in the markets is almost becoming a permanent condition. Learning to live with volatility and unpredictability is almost routine. Trying to make sense out of the numbers is impossible and developing a rational strategy for an irrational world is frustrating and non-productive. The next couple of years will challenge the most skilled operators and the list of obstacles threatening profitability seems always to get longer. The headliner is energy costs. Oil continues the march higher, with the cost of fuel dictating both product costs and production breakevens. The road to recovery for getting a handle on those cost and delivering affordable food must start with lower energy cost. While some believe oil will continue higher, behind the scenes changes are occurring rapidly and those changes will alter the direction of fuel prices and there are early signs the high fuel costs may not be unalterable. Consumers are switching to more efficient fuel friendly vehicles and abandoning gas guzzling SUVs. Electric vehicles will dominate future sales. Public transportation will find more use. Feed costs is the next hurtle to overcome and today’s high prices will find increased activity on the nation’s farms as farmers respond to price incentives present in today’s marketplace. Some cooperation from Mother Nature will be required but all out production will be the order of the day. Basis levels for corn will decline with lower fuel costs allowing truckers to correct pricing gaps and imperfections between surplus corn areas and deficit areas. Signs of economic slowdown are now reported daily. Housing starts have plummeted, layoffs in the workplace are becoming common. High interest rates will now impact agricultural land values that many thought immune to decline. A new realism will enter the picture for land values driven by forecast for lower crop values and higher land carry costs because of interest rates. The reality of a sharply smaller U.S. cattle herd will challenge beef producers with the task of delivering affordable food into a recessionary economy. The cash flush consumer of the past two years will be gone along with the sources of the handouts as Congress changes hands from Democrats to Republicans. The promise of returning to free markets unencumbered by government interference holds the hope for a return to affordable food." ---------------------------------------------- Talk about a political opinion on inflationary causes! Whoop!
A fun read from this week's weekly blurb. ---------------- PROJECTING A RECESSION A quick look at December Live Cattle prices tells the story of the toll a recession has for cattle and beef prices. Retailers have held on to margins in the store following tough times during the run up in beef prices earlier this year. Current conditions are changing their ability to hold on to margins and store and portion discounts are becoming common to clear the beef. Beef is still a perishable item. The December Live Cattle Contract is currently selling in the mid-$140s – about on par with the current market. No one believes there will be the same number of fed cattle available in December and everyone agrees December should be seasonally a better demand period. Placements of cattle on feed are on track for monthly declines well into the future. The reason for pricing the December board par with current sales is anticipation of a severe decline in demand for beef. The futures are telling us we will sell many less cattle for less money. The cost to produce a 1400# steer in December is not $145. An 800# steer purchased in the current market for $165 [index price] is expected to feed for $1.40 resulting in a breakeven of $160 — resulting in a -$15 cwt. loss. This is not sustainable, but recessions never are. Losses discourage bad behavior. The losses in various segments of the economy are designed to correct imperfections in product pricing. High food prices slow demand. The Fed aids the process with monetary policy by raising interest rates. The ag sector will make the many adjustments to errant prices both in absolute terms of price and in basis levels. Basises for both cattle and grain are currently distorted. Expect some relief in basis distortions as fuel prices fall from waning demand. Transportation woes will decline, and regional basis differences for cattle and grain will narrow as trucks become more available with cheaper fuel. The wild card will be beef demand and demand will depend on price. Today’s high prices for beef will find relief from sources that profited during the run up – processing and retailing. Fewer cattle will allow producers to find improved leverage in bargaining and retain more of the food dollar than the past couple of years. Retailers will be forced to concede margins to move product. All of the impacts of a recession will set the stage for rebuilding the numbers of cattle. The slow process of rebuilding the national herd will always require help from Mother Nature. Even with the best of conditions, the rebuilding will not take place over months but years. In the meantime, beef will be squeezed as culling rates decline and heifer placements on feed are pared back for breeding. --------------------------
More comments this week on the potential recession... ------------------------- READING THE TEA LEAVES OF FUTURE BEEF PRICES There are some trends for the future of beef production in this country that are inevitable. There is no debate regarding the fact of our presences in the liquidation phase of a cattle cycle. The number of cattle in the nation’s cattle herd is in decline confirmed by an ever-decreasing cow herd. The absolute number can’t be ascertained at any given point in time, but the trend is verifiable and won’t be reversed for several years. Historically, fewer cattle translates into higher prices for cattle and beef in the future. This anticipatory pricing structure was obvious in the futures market until fears of a recession took over price discovery in the deferred live cattle contracts. Today the December contract hovers at $145 below cash prices in the north for cattle today. No one questions the fact that beef production in December, a good time for beef sales, will be under current production levels. The question economists attempt to answer is the impact of a recession on prices. No matter how severe the recession, people will continue to eat, and beef will be an important part of food choices. This part is simple. The more complex aspect of prediction is how beef will be priced when compared to the other meats and then how consumers will decide between the various cuts of beef. Obviously, the grind will fare better than the premium middle cuts of beef. Beef pricing also will depend on feed costs and always looming in the background will be the size and price of this year’s corn crop. This will help determine not only the current cost to produce beef but also beef’s relative position in the marketplace of all meats. Probably equally important will be the ability of our beef industry to continue to build our export markets. To those operating in the live sector, market leverage will become important to price. Leverage determines how the gross margin in the beef business is divided among the vertical partners in the beef production chain. For the past several years, that margin has been captured by the processors and retailers leaving nothing but the scraps for the live animal producers. As the processors struggle for numbers of cattle amid a declining feedlot population, they will lose their ability to control the price. Retailers also will be plagued with budget stressed consumers who are looking for value in the store. There remain enough unknowns in the future of beef prices to assure no quant genius will simply enter all the factors into a formula and output the value for the future. No one can tell us the severity of the recession, or the duration, or the outcome of the fall elections, or even the expectations for the 2024 Presidential bid. As one of the legendary hedge fund masters told us recently, the next few years will not be about making money but conserving it." -----------------------------
I believe highs are in Live Cattle or nearly in, might make triple top, regardless, cheap area to get long term short/hedged. Feeders already have topped, add on to any steep retracements and hedge.
Regardless of strike or not, I hedge every trade with options, so I lose on the futures, I have enough options to cover the losses. I lose far more often on the underlying on all my future positions and options bail me out. But eventually I nail the extremes.