“Shootin’ The Bull”

by Christopher B Swift

​8/1/2025

Live Cattle:

In my opinion, what a squeeze market participants, and multiple sectors of cattle/beef production and processing, were subjected to this week.  Futures traders pushed fat cattle basis to as narrow as it has been before news of the Mexican standoff having been eased.  My conspiracy theory continues that the border closure has less to do with the screw worm and more to do with whatever it was President Trump wanted from the Mexican government.  This has led me to anticipate the southern border to reopen sooner, than later, as multiple protocols are in place, with more coming.  I have no fact, or heard of any rumor, it is my conspiracy theory alone.  This week's price action is believed to have allowed everyone an opportunity to do something.  For those procuring, it was merely averaging up the price paid for incoming inventory.  For those marketing, it was merely averaging up the price marketed through the year.  Interest in the cattle market is believed to have never been higher with great evidence of vertical integration and the capital to support the achievement of greater market share. Whether there is enough evidence of a top having been made or not, the spread between starting feeder and finished fat is believed to have projected feeding margins that made it almost too dependent upon an ever-increasing price.  Hence it is possible that some are being pushed out of the cattle feeding business.  The spread between cattle and boxes is projecting significant losses to packers with Tyson having shared some of the poor results this week in beef processing. Under such duress, packers will be anticipated to continue to push every button to find relief. Some of those buttons may be, do more of what is working, and less of what is not.  Pork and poultry production both showed significant profits with beef a significant loss.  

Up to Thursday's high, every marketing decision, regardless of who made it, fell short.  Clarity of hindsight, and an even more bullish stance with thoughts of expansion going to limit cattle on feed further, is expected to cause producers to be less risk aversive.  Nonetheless, this week provided producers with every opportunity to hedge fat cattle at the narrowest basis in months, as well as new contract highs. Backgrounders had it even better for a while with futures traders so anxious to own the most expensive inventory in history, they literally pushed it up against themselves, creating for a short period of time a negative basis.  By Thursday's close, anywhere you wanted to sell cattle at the highest price, it was on that day.  The more time until expiration of a futures contract, the more elastic the basis spread can be.  The closer to expiration, the less elasticity the basis has, due to the fundamental function of convergence and delivery, or cash settlement.  Recommendations were made this week to buy at the money puts on every newly acquired head of inventory or roll up lower strike put options to raise the minimum sale floor as high as possible in both fats and feeders.  With examples this month, and this week, of how damning the President's on again, off again, tariffs can be to markets, it was brought to the attention of producers that cattle could be subjected to similar aspects.  Those having been, watching Copper move 18% higher in one day, earlier in July, only to fall 20% in one day, with the bulk having taken place in 5 minutes, due to shifting tariff policies. With current limits, it could take 4 to 5 days of expanded limit moves to adjust price by 20%.   Imagine if the President made some decision that impacted cattle to that extent.  Maybe he did with the negotiations between Mexico back front and center. The price fell sharply upon this news release and produced a limit down move in a contract month of both fats and feeders.  I am sure a combination of factors helped to produce such, but it seemingly came in a rush with this announcement.

Of more concern than anything is the energy market and the bond market.  Both of which are believed key in determining the next most probable move of the economy.  Bonds moving higher suggests a recession is looming.  A few cities are now experiencing significant gluts in housing inventory with Nashville, one of those. Were energy to move higher, it is possible that commodity inflation, specifically energy, produces economic weakness.  If energy starts down, it may be that the stagflation has already begun to impact consumers, causing contraction in discretionary spending.  I know there is a seasonal tendency for lower box prices after July 4th, but nothing says it can't continue to tail off.  With the President himself stating that there may not be any more trade deals coming, and with tariffs being used for great shock factor, I can't help but anticipate significant volatility and price expanse in multiple markets.  Equities ended the week sharply lower with great expectations of "is this the top?" When everything is so good?  The dot com bubble happened when it appeared the stock market was bullet proof.  Similar to the way some of the sale barn analysts have touted the cattle market this week.  More than one has become vocal in stating there is no reason for cattle to trade lower.  There may not be today, but a border reopening would increase supplies and be anticipated to break the death grip some have had, using protectionism as a sword to maintain. Even if there is no hint of the border reopening, the recognition of growing vertically integrated supply lines may be producing competition for which fewer can participate.  This current environment of cattle reminds me of the hogs in 1998 where the term "deep pockets" was touted everywhere.  Only those with deep enough pockets could survive the lower prices and negative margins.  I think the same is being reflected today in that only those able to pay current prices, reflecting negative margins, and manage some portions of unmanageable risk will be able to continue in this environment.  No better evidence is available than at Friday's close where after a one-day benefit of lower starting feeder than finished fat on Thursday, the spread was pushed wider to the second widest width between starting feeder and finished fat in history.  Every time this spread widens, it creates a worse projected loss into the future without a higher fat price in the future to offset, or significantly lower cost of gain.  I would urge you to look at a copper chart in the month of July to see just what type of volatility that I believe should be expected in the cattle markets.