“Shootin’ The Bull”

by Christopher B. Swift

​6/13/2025

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Live Cattle:

In my opinion, some answers to last week's questions appear to have been answered this week.  Read this part of last week's comments before we start on this week.  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. 

While I am unsure whether the AI knew of an impending Israel strike on Iran's nuclear facilities, it appears this issue will impact consumers current discretionary spending habits.   Although a great deal of rumblings and rumors of an impending strike were heard through the week, it is now fact.  Higher gasoline prices, and every product impacted by higher energy prices, will force consumers to make difficult decisions on where those discretionary funds will be spent. As this issue has no bearing at all on the supplies of cattle or beef, it will have a significant impact on demand for both.  Cattle feeders have been exposed to basis risk for quite some time now when placing cattle, but were at less price risk, due to the short supplies of inventory contributing to higher cash prices.  Today, the cattle feeder is exposed to both basis and price risk, simply due to aspects of potential weaker consumer demand.  Backgrounders have had the futures trader as their best friend for the first 6 months of the year.  They have walked hand in hand, if not out in front for the backgrounder to lay off their risk.  Now, like the cattle feeder, the beneficial negative to even basis has fallen to positive, with aspects of going sharply positive.  As well, it appears that backgrounders may be subjected to price risk as well, if cattle feeders were to lower bids.  Of the most important factor of any of this is how much more exposure to price and basis risk the cattle feeder, and now backgrounder, have to assume.  I guess I should be throwing in the lender, due to their exposure through producers. Since this all just started on Friday, it is difficult to assess how long it will last, or impact on price it will have.  Friday though, futures traders got busy and offered very little in the way of helping producers manage price risk.  Again, it appears that the majority of the risk of potential adverse price fluctuation lies squarely on the shoulders of cattle feeders. 

You would think there would be a great deal to discuss with the most recent factors upon us, and cattle at historical highs, but having made comments this week of cattle feeders not behind a curtain, but shear drapes, leaves little to discuss.  The risks being assumed are phenomenal with no reservations it could grow significantly worse.  Even if not worse, in reality, the price needs to keep climbing and climbing more to return what is currently the highest priced feeder cattle via the CME FC index.  Many have attempted to fade Friday's price action, due to this issue having no impact on supplies of cattle.  I agree, it does not have any impact on supplies of cattle, but starkly disagree with fading this issue.  It is a demand issue, and now greater input costs of potentially no lower feed prices, sharply higher diesel fuel prices, interest rates on the rise, with the rise in energy prices impacting a majority of goods and services cattlemen need.  Note the quick action the US took on bio-diesel mandates due to the sharp rise in energy prices.  I think that were the US consumer to balk on beef, the Mexican border could open overnight. 

It is interesting the difference in how corn reacted than beans.  Can you guess why?  It is because gasoline is the fuel source of the consumer and higher prices tend to curb demand.  Hence gasoline rose the least in Friday's activity, leaving less demand for ethanol.  Diesel fuel is the power source for manufacturing, production, and war.  I think there is only one refining difference between diesel fuel and jet fuel.  Hence, it was up nearly twice of what gasoline was. Bean oil ended the day locked limit up across the board.  This is due to the aspects of alternative bio-diesel energy and the speed of increased government mandates for.  Bonds were down sharply as the flight to quality faded fast with known factors of inflation, due to higher energy prices.  Stagflation may have been upended by a new round of inflation.  Equities sold off as well.  Energy touches nearly everything we consume or are provided a service for.  Next week's trading is expected to be as volatile, if not more, depending upon further actions, or reactions.  As well, next week's trading will be abbreviated due to a holiday on Thursday, and Friday's cattle on feed report.  Don't be careful in your decisions going forward, be prudent.