“Shootin’ The Bull”

by Christopher B. Swift

​5/30/2025

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Live Cattle:

In my opinion, what a week of trading!  False rumors kicked the week off, plummeting cattle futures in minutes.  By week's end, price of most contract months exceeded Tuesday of this week's high.  More interest was generated due to the exceptional risks and manipulation of production to keep from turning backwards. Risk is the wide positive basis and manipulating production continues through increase slaughter weight, seeking a lower cost of gain, and praying the price of fat cattle continues to move higher.   Open interest increased quite a bit this week.  Recent comments have struck a chord as feedback has not only been very positive, but confirming of what has been expected to come.  That being, the agenda is rationing producers.  Lenders have very good calculators and can clearly see the cattle feeders' $500.00 plus per head profits today, moving to around $200.00 per head loss on newly replaced inventory.  It is pretty much believed that current feeder cattle prices are being justified due to current fat cattle price. With pencil to paper, an 850# steer at a $298.00 May average, with a 600# cost of gain at $1.10, will need $224.00 to breakeven.  The significant positive basis in fats is letting cattle feeders assume significant risk. 

Futures traders are no friend of the cattle feeder.  The wide positive basis suggests that were they to run futures to cash, the industry would allow futures traders to be cattle feeders.  In my mind's eye, the positive basis is of some fundamental benefit to commodity funds, believed holding a large percentage of the long open interest.  As basis has tensity, the wide positive basis already produces significant tensity of the basis. Therefore, when stretched a little further, it tends to find some resistance.  So, as in Tuesday's selloff, note how much further feeder cattle futures fell than fats.  I believe it due to the negative to even basis in feeders had no tensity of basis, therefore allowing for it to stretch much further than fats before finding resistance. Basis is a mathematical equation that is always quoted as cash minus futures.  Therefore, when cash is above futures, it is positive basis and when cash is below futures, it is negative.  Get a rubber band, clap your hands in prayer and place the rubber band around.  Now, separate your hands and that is the tensity of the spread between cash and futures.  You can cross them the other way and there is no difference in basis that is wide negatively. The natural tendency is for either or both cash and futures to come together, just like the rubber band pulls your hands back together, and that is what takes place at expiration of a futures contract.  

Futures traders continue to hold up backgrounders by offering them the ability to market in the future at equal to today's price, or somewhat better.  As cattle feeders have yet to voluntarily contract, some are using feeder cattle futures to hedge future purchases.  As you can tell, until recently, this was only keeping up with market movement as there were no discounts in the back months.  Today, there are some significant discounts into next year's cattle.  Hence, cattle feeders that continue to believe there is no top, should be very interested in owning inventory at the lower price.  For the moment though, with little basis spread, whether the market goes higher or lower, you have an advantage over the cattle feeder of not having to assume risk that can't be managed.  So, long way around the barn, use that advantage.  Lenders have expressed concerns when having to replace new inventory.  As lines of credit grow, and interest rates along with them, lenders need risk management as well.  An "Assignment of Futures Contracts" is a security agreement that allows 3rd party access to your commodity account.  Lenders can see, through duplicate statements, that clients are adhering to risk management plans, potentially allowing for greater expansion of working capital.  As evidence continues to mount of great desire to strengthen supply chains through vertical integration, expect more volatility and price expanse before complete.  

Energy ended soft for the week.  The sideways trade gave way to a little lower by Friday.  OPEC's desire to raise production isn't helping any, but I am unsure that this will be a bearish factor yet.  I continue to anticipate a higher energy price.  Bonds recovered further from the new contract low made last week.  The volatility produced by the current administration's actions on tariffs and constant shifts in verbiage on, is not helping farmers and ranchers.  Volatility can have a way to entice you sell at too low of a price, or buy at too high. Hence another reason to conduct business when more conducive.  Corn and soybeans remained soft this week as the growing season is underway.  I continue to recommend owning call options on input costs while at the lower end of their respective price ranges.  When managing input costs, call options can be of benefit to secure a price for which you no longer wish to assume the risk of if reaches those levels.