“Shootin’ The Bull”

by Christopher B. Swift

​6/06/2025

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Live Cattle:

In my opinion, this week most likely helped to further solidify more vertical integration than the past two years.  Commercial cattle feeders are believed impacted by the increasing number of farmer/feeders, while commercial packers impacted by the increase of production capabilities supplied through subsides in the Biden administration.  Both of these smaller entities are believed a bur under the saddle of commercial production and processing.  Horrific basis spreads, and spreads between contracts months, leaves cattle feeders susceptible to a great deal of unmanageable risk. Due to this known factor, and watching cattle feeders attempt to outbid one another to make sure they have the inventory, is evidence that producers are "having to" continue in these conditions if going to remain in business.  Without a reopening of the Southern border, there are few aspects of an increase in inventory anytime soon.  While many are relying on the supply to continue to keep prices elevated, my concern remains demand.  Demand for beef at the retail grocer, export demand, restaurant demand, feed yard demand and packer demand.  All of which were any to subside, I think the ripple effect would be significant.  Until then, all aspects of the industry will be stretched thinner with only a few appreciating greatly from the current price advances. 

The past two weeks have produced developments of concern.  Last week, we saw approximately 117 drones, valued at about $81,000.00 lay waste to 7 billion dollars of Russian aircraft.  This week, two Chinese nationals were caught with a deadly strain of fungus that could be extremely harmful to Wheat and other cereal grain crops.  Throw in the middle-east unrest, and crude breaking out to the upside at weeks end, and there appears as multiple indirect risks that can have grave impacts on consumers and the economy.  As inflation stagnates, the President's volatile movements on tariffs, and now a spat with his best buddy, economic results are expected to slow in the speed which we saw the first few months of the President's administration. To throw something out of left field, consider the attention eggs received.  If beef was subjected to the same attention, what would the President do to pacify the beef eating public?  In the case of eggs, he imported tons of eggs from other countries to relieve the pressure.  While the beef and cattle industry continue to pride itself on nutrition and quality, they are leaving out a very important part of the production equation, price.  Not everyone can afford US grain fed beef and it is obvious the damage price has already done when viewing the shift of consumer appetite to the grind over cuts. Long way around the barn to suggest that while cattle feeders are taking on significant unmanageable risk, there appears outside market forces that could, and can, unravel the best laid plans.  

Hedged cattle feeders are not in as bad a position as some may think.  As basis is a spread between cash and futures, and the spread between the two widening with cash more than futures, cattle feeders are making the spread.  No different than if you bought June futures and sold August futures, it does not matter which way prices move, as long as the spread between the two widens in your favor.  What the issue for cattle feeders is that were that basis spread to close with cash moving to futures, there is significant width to converge between the two before the spread was no longer a detriment to you.  Futures traders remain overly hesitant to push all, but spot futures, to the levels of cash.  Why? Cattle feeders would be anticipated to lay off every head in the yard on to the futures market. Backgrounders though continue to enjoy an overly beneficial basis spread for which could disappear in a short time frame due to further expansion of limits. 

A margin requirement is a good faith deposit that states the holder of the contract can meet the delivery specifications.  A performance bond is on every futures contract and the margin is the premium you pay for that bond. When the futures contract increases in price, the CME will tend to raise margins to keep a certain percent of the value of the contract on hand.  However, this week, the CME expanded the price limits.  Why?  Because limits are a pressure valve and when hit, pressure builds immensely in a very short period of time.  Hence the wider the expanse of limits, the less likely they are to move to limit.  It increases the amount of pressure to be released before allowing it to build.  Think through that over the weekend.  How did the CME come to this conclusion and why?  I think, not to be confused with fact, they may have posed a question to the AI and it spit out that the potential for basis spreads to remain as is, and the risk it places producers in, suggested that greater price expanse may need to take place to keep from a large build in pressure.  As open interest has increased significantly over the past two weeks, and known increase in long commodity fund positions, a great deal of who is assuming your risk have no stake in the cattle industry.  As well, the speed in which they "funds" can move, spreading basis grossly against producers, is unmatched.  To repeat the most common phrase this week, "what a time to be in the cattle business"! 

“This is intended to be or is in the nature of a solicitation.”  Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.