For those interested I hold a weekly livestock webinar on Tuesdays and my next webinar will be Tuesday, October 29, 2024, at 3:15 pm. It is free for anyone who wants to sign up and the link for sign up is below. If you cannot attend live a recording will be sent to your email upon completion of the webinar.
To Hedge or not to Hedge…
Questions abound for the cattle markets as we move toward the new year. There has been fairly good demand for beef even as we have seen new all-time high prices this year in the grocery stores. Our exports have been robust despite the high beef prices and a strong Dollar. The question is – will beef demand last as we head into the new year?
It is our opinion given recent monthly on feed data that the industry is looking at tight supplies of cattle. We therefore think the packer has encouraged and enabled the feedlot to put more weight on cattle. With corn relatively cheap and the weather conducive to adding pounds, we are at record weights for cattle per USDA, and the packer is paying the feed lot to keep adding pounds. This has enabled the packer to cut back on slaughter and keep the cattle in the feedlots longer giving the impression that cattle supply is in good shape. The lower slaughter and heavier weights have kept production close to the previous year per USDA, but has left the retail industry nervous that production is tightening. After a dramatic drop in cutouts in September, it is our belief that we have seen the packer slowly regain control of the retail market. The lower production has driven cutouts higher back to the summer highs. If this keeps up, it could eventually price the consumer out of the market for beef.
Drought issues continue to plague certain areas, forcing producers to place the cattle in the feedlot. They are also willing to place their cattle in the feedlot because of the high prices they can get now. Why take a chance and hold on to your cattle when you can get close to record prices for your cattle. That is not to say cattle prices won’t go higher. The prudent thing for a producer is to place protections (a hedge) for your cattle… just in case. We are at record prices and if things go south….
That is the biggest issue the cattle markets are facing, in my opinion. They are near record high prices and that’s not to say that prices can’t make new highs, but you have to remember that there is the little battle going on with inflation. When you look at the other consumer mainstream products such as crude oil, gasoline, heating oil, natural gas, lean hogs and the agricultural products…. They are all well off their all-time highs. The last major bastion of high prices is in the cattle markets. To get a handle on inflation where do you need to cut prices… That’s right, the cattle markets (in my opinion). There are a lot of unknowns we face as we are in the last phases of the election season. The government has kept the spickets wide open to give the illusion of a vibrant economy. After the election, all bets are off.
Continued weakness in consumer markets into the election and a potential near term softening at the auctions may pause any feeder rally into the election. We could see the index fall from just above 250 to the mid to low 240s post-election into the midpoint of the 4th quarter. With this in mind, please consider the following trade. Longer term we see headwinds for the cattle complex that potentially could weaken demand. First near-term Feeder cattle hedge.
Trade Idea
Futures-N/A
November Feeders settled at 248.525 (10/24/24)
January Feeders settled at 245.525 (10/24/24)
Options-Buy the November 2024 Feeder cattle 248000 put. Sell the January 2025 Feeder 253000 call. Work the order at 100.00 over for a $500.00 collection minus all trade costs and fees. GFF25C253000:X24P248000[1-1]
Risk-
Options-there is unlimited risk here as one is naked short a January 253000 call. Therefore, in our view, this hedge trade is for one who needs downside protections in feeder cattle near term. If filled at 50- over, place a bid to cover at -400.0 points on a GTC basis to for a $2500 collection minus all trade cost and fees.
As we head into 2025, we see potential headwinds entering into the markets. Major corporations are demanding employees head back to the office for the full week instead of 2 to 3 days per week. This will cause added expenses for the consumer as he/she needs to pay more for transportation, possibly clothes (people won’t be working in sweats any longer). Train passes and other expenses they wouldn’t have if they were still at home. Plus, would they have the time and energy to prepare dinner after a long day at the office and a long commute. In short discretionary spending could see real slowdown post holidays in our view. as their funds become more limited because of the above issues they could soon face.
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Ben DiCostanzo
Senior Market Strategist
Walsh Trading, Inc.
Direct: 312.957.4163
888.391.7894
Fax: 312.256.0109
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