Thinking Like a Spec Trader.

It’s interesting to watch what the funds have been doing over the past couple of weeks. Open interest declined all last week - even as cattle.. rallied? Live cattle added 3,461 contracts yesterday, which was a positive sign after last week’s higher cash market, but feeders finished with another net decrease. Point being, the funds still seem reluctant to carry their weight or put much conviction underneath this rally. I’ll be interested to see what today’s numbers look like on tomorrow’s report. Short-covering certainly helped get us from Monday to Monday - but where’s the new money? And is it possible what money we did have started taking some profit today??

Some might say managed money will start showing up when consistency holds. Others might argue the possibility of higher interest rates and inflation could send speculative money toward grains, where higher energy prices tend to lend more direct support to corn – which wouldn’t necessarily be bullish cattle.

Then there’s the weakening of the U.S. dollar that could ultimately go one of two ways. On one hand, it could work for us to make U.S. beef more affordable overseas and offer some price relief in major markets where we need stronger export demand, like China and South Korea – both of which are buying less product at higher prices today. Increased demand for higher-end cuts this winter, when the U.S. consumer shifts buying towards ground product, could also be a good thing. But as producers, we still rely on the middleman for that to ever reach our pockets.

On the other hand, how does inflation affect spending for the U.S. consumer? Higher grocery prices eventually force people to cut costs somewhere. To you and me, cutting back on protein sounds ridiculous when there are plenty of luxury and convenience items that could go first - but unfortunately, that isn’t always how consumers shop. Some may trade down to cheaper cuts, particularly ground beef, which is fairly normal this time of year anyway. Others may reach for cheaper proteins like chicken or pork.

But eventually, it all trickles back to the packer, the feedyard, and ultimately the producer. Then the question transitions to: what do operating costs look like from here? Equipment, land, and interest are 3 of the few that are already through the roof. Now diesel and fuel are joining them, with feed costs creeping up the list fairly quickly. How does that change what feedyards are willing to pay for replacement cattle going forward? Or does it - considering there are simply fewer cattle available? Or does Trump put this Iran conflict to bed and relieve fuel prices this winter like he’s been promising for months?

Those are all viable questions - and I’m sure plenty of them have crossed the mind of a spec trader over the past couple of weeks, as well as all of us - especially after seeing the latest inflation numbers or simply stopping at the gas pump. Nearly everything we use is carried by a truck, and those trucks run on diesel. I wish the pain stopped at the pump, but it inevitably works its way through every sector - consumers included. While everyone worries about the price of beef in the grocery store, everything else on those shelves feels the weight of higher fuel costs.

Meanwhile, cash trade on fats has yet to get underway this week, which is a good sign for feeders holding out for steady to higher money. Higher slaughter rates and profitable packer margins make that a real possibility - as long as boxed beef prices remain stable enough to keep chain speeds up and futures remain supportive throughout the rest of the week. The OKC feeder cattle auction showed sales on 5,198 head with steers up $15-25 and heifers up $10-20, which should lend some support to the CME Cash Feeder Cattle Index that sent futures surging yesterday. Per usual, this industry - and quite frankly the economy as a whole - are leaving us with plenty of question marks here. But like I always say, the market usually hands us an answer in one form or another - stay tuned.

Thanks,

Samantha Cozza-Wright