Fat Tuesday with Mike Sands | SREWWORM in U.S.

New World screwworm jumps to the top of the cattle conversation, and we sort out what USDA actually communicated versus what people think they heard. We also connect the pest narrative to market structure, especially why a strong basis and managed money long liquidation can pressure futures and pull on cash decisions. 
• USDA’s New World screwworm messaging, five-point plan, and what remains unclear 
• No food safety issue but real risk of negative consumer reaction 
• Why cattle movement drives spread and why the border closure bought time 
• Practical biosecurity, treatment tools, and the need to put eyes on cattle 
• Sterile fly technique limits today and why added capacity matters 
• How states may respond and why quarantine protocols could shape trade 
• Managed money net long positions and how long liquidation hits futures 
• Why June and August basis levels look unusually strong 
• Seasonal spring peak patterns and what futures imply for summer cash 
• Feeder cattle speculation unwind and why deferred discounts may be too bearish 
Yeah, if you're watching, listening, have something that or a chart that you'd like to maybe see in an episode coming up, let us know. 

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Transcript

SPEAKER_01 0:22

Welcome back to the Fat Tuesday show. Mike and I are here on a Wednesday. We've kind of gotten in the habit of that, but man,

Why Screwworm News Matters Now

SPEAKER_01 0:31

I'm glad we waited to today after the big announcement yesterday with Secretary Rollins coming on with several, several, probably hundreds of folks from the media and ag world to kind of discuss some things about the new world screwworm, which has been at the top of everyone's mind. It's getting pretty dang close to the border, and it's just a matter of time before it's here. So we're going to spend some time talking about that today. We've kind of seen some changes in the managed money and speculative uh community. We'll talk about that as well. But yeah, Mike's the man to go ahead and break everything down for us. How are you doing today, Mike?

SPEAKER_00 1:09

Doing just fine, Jed. Obviously, a good bit of excitement associated with uh the new world screw worm news conference and discussion yesterday, first in anticipation of the news conference, then listening to the news conference, and then spending the rest of the afternoon trying to figure out exactly what was communicated during the news conference. So it just dominated the news cycle during the course of the day. And it looks like with USDA's indication that they're going to have updates maybe two or three times a week, that it's going to continue to be an ongoing topic of a discussion. Obviously, in Secretary Rollins' discussion, she reiterated the five-point plan that they announced a year ago with regard to what what overall rules and regulations might be as the pest moves forward and potential containment in the U.S. So that that overall plan is still pretty much in place. The other things that at least a couple of things I picked up. Number one, that there's no food safety issue associated with New World Screwworm, but obviously I think there is a good bit of risk that consumers are going to respond to it negatively, and of course, that's going to affect futures expectations as well. So overall consumer demand may in fact be a temporary issue. I don't think we can rule that out. A couple of other things that the secretary indicated, maybe first and foremost, reiterated that most of the northern

What USDA Says And Why

SPEAKER_00 3:06

movement from southern Mexico into northern Mexico of New World Screwworm was related to livestock movement, that is, cattle movement from south to north. And since the the pest movement was associated mostly with that cattle movement, that's precisely why the border was closed. And I think it's the closure of the border that kind of kept the northern movement or at least slowed it down. It didn't prevent it, but it it slowed it down and maybe gave the industry a year to kind of get ready for it. And as you indicated, I think the odds are are pretty high that we're going to experience or see a confirmed case in the U.S. in a not too distant future. And then the question is going to be what kinds of treatment and quarantine protocols and restrictions might be in place to kind of contain the movement within the U.S. And at least at this point that looks like it's it's still pretty much a work in progress. No definitive details that I've been able to find.

SPEAKER_01 4:28

Yeah, I mean, I think it's a matter of time before it's here, like I said, and it just bought us some time by closing the border, which I think was a beneficial thing because I mean, obviously it did some weird things to the market with regards to limiting imports of Mexican cattle, but it gave us as producers some time to kind of make sure that our biosecurity practices are up to date, that we're kind of on the forefront of kind of using the right pharmaceuticals when it comes to Dectumax, poron, things like that. Uh just trying to, you know, the the best offense is a good defense, and having a good defense,

Ranch Biosecurity And Seeing Cattle

SPEAKER_01 5:05

I think probably what allows us to thrive as this thing kind of tears through cattle country. And I don't think it's actually going to kill very many cattle. I mean, it's a long ways from their heart, and we have the best animal husbandry practices in the world. So I think if as long as you're a good stockman and stay on top of things, we should be all right. The scarier part, I I think, I don't use scary, I don't want to put a negative connotation on it, but maybe the concerning part is the part of the country that it's coming into. I mean, this isn't coming into Nebraska where cattle get gathered at least every couple months, and you know, we have eyes on them at least a couple times a week. I mean, they're kind of going into big range country where we may get gathered calves kind of once a year, and we might brand once a year, and that might be the all the time that those cattle get seen. That is a little probably concerning, you know, with regards to you know checking in on things. So hopefully, you know, kind of some practices step up there. You know, it might take a bit more manpower, a bit more diesel fuel, and a few more horses, but I think that's probably the thing that will allow it to spread the area that it's coming into.

SPEAKER_00 6:21

That's a good point, Jed. And I think to some extent that that point was reiterated in the discussion yesterday that the most important thing that a cattleman can do is put eyes on his cattle and monitor those cattle fairly closely. But as you indicated, in a lot of those big South Texas ranches, seeing those cattle uh every day is is a difficult process, but uh it will require some changes in management protocols across the entire industry in terms of how we monitor and manage cattle. And the other thing that you indicated is that the treatment protocols that we have today are much, much

Sterile Flies Plus Quarantine Rules

SPEAKER_00 7:11

better than what the industry was restricted to 50 years ago when we eradicated it back in the mid-60s. So we have the management capability, it's going to cost money, there are going to be restrictions on movement, but we do have the capability to manage our way through this. And as uh the secretary indicated yesterday, while the sterile fly technique and the capacity that we have to manufacture flies at this point are not sufficient to contain the pest south of the border, there is a new facility that may very well be on stream by the middle part of next year, which is earlier than what had been originally projected. That does allow maybe a little bit of optimism that in the not too distant future they're gonna will have the capacity to at least restrict further movement north. It's going to take some time to force the uh the pest uh invasion further south, but at least it does offer the industry a fighting chance to keep it from moving further north. Yeah.

SPEAKER_01 8:36

And we're gonna see it kind of spread a bit, you know, just here and there. I mean, we're not gonna fully stop, you know, the the horses, the show livestock, the people's pets that are inevitably going to pick it up and not know about it. But man, if we can, you know, just kind of stay on top of just where tracking it, knowing where it's at, tracking the spread. It sounds like our COVID discussion we had six years ago as we were all sitting at home. But if we can track it, we can control it to some degree, but it is going to probably get to some other states. And, you know, I think as long as we're trying to you kind of utilize these sterile flies to eventually, you know, push it back down, I think we'll be successful there, which is just something we're gonna have to deal with for a few years.

SPEAKER_00 9:28

Yeah, I I think that's the the overall issue is that we do have the the capability in terms of treatment protocols, inspection, veterinary inspection, that type of thing to manage it, but it will impose some restrictions in terms of overall cattle movement once once it does break across the border. The real unknown at this point is how some other states may respond to an outbreak. Let's say it does move into Texas. How will Kansas and Oklahoma respond to that that that development and what kind of limitations might there be in terms of overall cattle movement? My best guess at this point is that it may very well revolve around the same kind of treatment and quarantine protocols that were used south of the border after the initial border closure. There was a period from November to the following May or even July where the border was partially reopened. There was some treatment protocols that were put in place to make sure that those animals were not contaminated that moved across the border. So the point is by overall inspection and monitoring cattle, by treatment and quarantining those cattle, uh, and a veterinary inspection certificate, we're gonna be able, I think, to maintain some business movement of cattle that that would typically be the case. It's not going to shut down movement. I think part of the objective that USDA has is to maintain the ability to continue business. There are going to be some restrictions, no question, but the whole idea is not to totally isolate and shut down business. Right.

SPEAKER_01 11:34

Uh, you made the comment there about veterinary inspection papers, and I think that's something we're gonna have to ramp up because we've gotten a little lackadaisical on it, kind of from some of the smaller producers and some of our fringe states. You know, it's well, you you need a vet paper to cross state lines, but you know, we'll probably be all right this time just going across the pasture and then coming back. I I think we probably need to crack down there a little bit more. Probably local law enforcement could probably do their part, you know, asking for those if you happen to get pulled over, because it is a really good program, and there's a reason that we've had it. It's for things like this. And I think if we kind of ramp things up there, that would help. Let's we got a pile of slides still to get to, even though I think we had some good conversation and discussion here. Let's go ahead and pop them on the screen.

Managed Money Starts Liquidating

SPEAKER_01 12:25

The topics for today, the new world screwworm, like we just talked about, dominating the news cycle, the managed money, long liquidation with a strong basis and a pressure on the cash trade, the strong June basis, the weight on cash prospects there, and then strong August basis implies lower cash prices into the mid-summer months, and seasonally lower fed cattle prices prospects may be making futures more bearish there, and then managed money, long liquidation pressures, feeder futures, and price prospects. Here's the first chart we have. Mike, the floor is yours.

SPEAKER_00 13:05

Alrighty, sir. Well, just reading through and and reiterating those topic areas. Obviously, we spent a good bit of time talking about New World Screwworm. The second part of the issue is that we're going to spend a good bit of time talking about how strong basis levels are and the impact that that may very well have on cash prices. We've talked about the relationship in the past between managed money net long positions in futures related to, or at least positively correlated with overall changes in futures prices. And the black line that you see running across the chart is the weekly close of live cattle futures. The blue line is the large spec or the managed money net long position in futures. And obviously, there is a positive relationship there that is price levels move higher, the large spec net long typically gets bigger. When cash prices or futures prices move lower, there's a tendency to liquidate those longs. And historically, if you look at that blue bar across the top, when we've seen large the managed money net long get up to around 140,000 to 150,000 contracts, that's historically large. We got there a few weeks ago, and you start to look for a little bit of a transition and wonder at that point what the catalyst might be to encourage those managed money net longs to cover or to liquidate those long positions. I think we've seen some of that begin to develop over the last two weeks. Looks to me like the managed money net long is about down about 20,000 contracts, or now, uh, since this data is almost a week old, we've probably uh liquidated at least another five to six thousand contracts. And as those longs uh cover those positions and move out of that long position, it does put pressure on futures, and one of the reasons that we're looking at the big discount on futures relative to where the cash market is at. That's one of the contributors to this really strong basis that we're going to talk about here over the next couple of charts. Uh, at this point, we're looking at the June contract, nearby June, uh, that's uh trading almost eight dollars

June Basis And Cash Pressure

SPEAKER_00 15:53

under the current cash trade. Uh and you can see over the last couple of weeks, this is a basis chart for the last 12 weeks of the June contract. We're here in late May in the early part of June. And over the last three weeks, if you will, the board has traded anywhere from eight to uh maybe as much as ten dollars under cash. Typically, we might be somewhere in the area of a four to five dollar discount to cash, which is pretty typical for this time period of the year. The pessimism that we've seen that uh at this point just pervades the industry, uh, it may be related to concerns about beef demand, it may be related to concerns about consumer spending in the sense that they they re-adjust their spending patterns away from beef to lower valued protein items, or maybe they're spending more money to fill their gas tank, and that leaves less to spend at the meat counter. All of those things are are contributing, I think, to some of this pessimism with regard to cash prices, and that's carrying over to the futures market. In addition to that, we know we've got more cattle on feed now than we had a year ago at this point. Carcass weights are record heavy, maybe giving the cattle feeder a little bit less flexibility in terms of merchandising those cattle. Uh, and in addition to that, of course, we've spent time talking about New World Screwworm and what uh how consumers might react to an outbreak in the U.S., all of that uh is contributing to this pressure on futures prices that in turn, from a hedged standpoint, if you're a cattle feeder with hedged cattle, you're looking at an opportunity to cover those hedges at much lower price levels than what you might have anticipated when the hedges were put in place. So that improves, if you will, the hedged return on those cattle. And even if you're not a hedger, you're looking at these big discounts on futures relative to cash, thinking that maybe I need to merchandise those cattle relatively soon rather than risk waiting on the potential lower price levels that the futures market is implying. So it's just an overall pessimistic type of market structure that I think conveys a good bit of pressure on the cash market.

SPEAKER_01 18:49

Yeah, I mean, we sent some calves, you know, you know, poor doers, some old calves that, you know, lost calves and stuff. We've kind of been trying to get them out pretty faster than normal. We sent them the last couple weeks. I'm kind of glad that we did because we've obviously seen a downturn, but man, they couldn't have named that bug, the NWS, a poorer name. I mean, it implies that it's new, which it isn't. It implies that it's a worm that it isn't, and it just makes it sound big and scary and bad and evil, and you know, it's a problem. But man, I from a consumer sentiment reason, it worries me slightly that when the general public hears of this, when it finally kind of gets on everyone's radar here, because it probably will. I mean, I wish we could rename it something, uh, you know, just the cattle fly or something that's not near as bad as what it is.

SPEAKER_00 19:47

No question. Uh, and you know from an overall news cycle standpoint, uh, that the news media, the streaming news media is is going to uh utilize some pretty incendiary headlines like flesh-eating parasite invades U.S. cattle industry. Those types of things are probably going to be pretty common. And it's going to be difficult for consumers that obviously may not be very close to this kind of development. It's pretty difficult to anticipate that that the reaction might be anything but negative, uh, at least until the word gets out in terms of virtually no food safety risk associated with this. So I at least uh in the early stages, uh, it's it does pose the risk of being a negative demand factor. Absolutely.

SPEAKER_01 20:54

Uh and I think we will rebound because I mean it is the superior protein product, and I I don't think we'll lose that. But yeah, it will send kind of shockwaves for uh maybe a week or so if it kind of breaks into the mainstream news, which we've seen it kind of on some smaller ones, but no kind of Fox or CNN major news headlines, not that I've been aware of yet.

SPEAKER_00 21:20

Um I think that's exactly right. Um and you know, we talked about the June contract, uh carrying a big discount to cash. That's the biggest issue right here in the very short run because it's the nearby contract. But uh, if you go out one month further or

Demand Fears And Media Optics

SPEAKER_00 21:37

the next nearby is the August contract, and at least at this point, uh it's trading anywhere from say $16 to $17 discount to cash. More typically, uh, here in early June, we'd be somewhere in the area of a five to seven dollar discount. So once again, a much stronger basis than typically we. Be the case. And if you think about what those futures prices are implying, if we think about a normal basis at five to seven under, and last week's cash price was at 257, then the futures market under a normal basis would be implying a cash trade at around 250 to 252. Obviously, that's lower than last week's cash average. But if you factor in uh that $16 basis that we're currently looking at, uh the futures implied price is down around $241. Obviously, that's a much steeper discount and implied futures, futures implied price at some point in the future. And the risk, of course, from cattlemen's standpoint is that I'm not going to sit around waiting to see if, in fact, those lower price levels materialize. Obviously, the futures market is not necessarily a particularly good forecaster of cash prices, but the risk is there that if the board is right, then maybe I'd better move some of those cattle early, as you just indicated, with regard to your own situation.

SPEAKER_01 23:22

Yeah, I mean, futures and cash have to convene at some point. I mean, the cattle market's been stubborn there and kind of acting like a five-year-old that doesn't want to take a bath. But I mean, it's gonna happen here. And you know, maybe we see an uppick, uptake in futures to go ahead and meet cash. But right now, we've kind of maybe started to see a bit of a downward trend. So yeah, yeah, I think it's on the top of or needs to be on the top of everyone's mind going here into the summer.

SPEAKER_00 23:50

Yeah, if you look at that basis level sitting up here at at 16 over,

August Basis Signals Summer Risk

SPEAKER_00 23:56

at this point, we know when we get down to down here to August at expiration, we're gonna be pretty close to um somewhere in the area of of par with uh uh the cash and futures. So the implication is that you don't want to be the last guy to sell in that kind of an environment. Absolutely.

SPEAKER_01 24:17

I mean, yeah, I think having an exit strategy right now, if you got cash cattle or cattle on hand, kind of sell for cash, whether it be cash bids on fats or just taking some feeders to the sale barn, having a plan to do that into the summer months is going to be kind of important here. Let's roll on to our next slide. Fed cattle prices often peak seasonally in the spring.

SPEAKER_00 24:43

Yeah, it's not unusual to see our cash market peak out here and maybe as early as late April. Sometimes uh it carries out maybe as as late as June. But in this April-June time frame, it's not at all unusual for cash prices to peak out. That's a function mostly of a pretty strong seasonal demand for beef this time period of the year, and as a result, does have a pretty strong supportive impact as far as cash cattle prices are concerned. In retrospect, with hindsight being a little bit closer to 2020 than foresight, we can look back to the middle of May, and we did see the cash market trade at that 260 to 265 area in the southern plains. And I think for the most part, that's pretty good odds that uh that established our spring high. Typically, a normal seasonal pattern would be following that spring high, some weakness into mid to late summer. So that's what the solid red line running across the top part of this chart reflects as a seasonal movement that maybe somewhere in the area of 240 might reflect a seasonal decline in cash prices from that

Seasonal Peaks And Implied Cash

SPEAKER_00 26:07

260, 265 high. But if you look at the dotted line just below that, the dotted red line is a futures implied cash price based on past relationships between cash and futures. We have a futures implied cash price in the late summer and fall that's down around 230. And that just reflects this pessimism that the board is conveying at this point with regard to overall expectations. Now, that looks overly pessimistic to me. I don't, from a fundamental standpoint, think that we'd necessarily see cash prices move that low, but something around the 240 area at least would be my initial downside objective. Absolutely.

SPEAKER_01 27:00

Let's roll on to our last one here. Manage money long liquidation weighing on the feeders, futures, and index.

SPEAKER_00 27:09

Yeah, we talked about uh this is a

Feeder Futures And Spec Exits

SPEAKER_00 27:12

similar chart in feeder cattle relative to the Fed cattle chart that we looked at just a little bit ago. And again, the black line running across uh the chart uh is nearby feeder cattle futures, reflects, of course, what the index uh has has been doing. And um, we saw that index peak out in the 375 area, maybe a little bit higher. And and we've been chopping around between basically 365 and 375 for the last several weeks now, but a weaker undertone. The blue line that you see running across there uh is the managed money net long in feeder cattle. You can see when feeder cattle prices peaked out last fall, up in that 375 area, that the managed money net long uh increased pretty sharply during that period. And now we're looking at a transition again, long liquidation that is is a reflection of those speculators moving back out of the market. Over the last couple of weeks, we've taken that managed money net long from around 38,000 uh down to around 10,000 contracts. That has weighed on futures prices, and one of the reasons, along with all of the other stuff that we talked about, one of the reasons why the board is at such a big discount to cash. It's a similar situation to what we're looking at with regard to Fed cattle, but again, deferred feeder cattle futures for late this year and the early part of next year are somewhere in the area of $30 to $35 discount to the price levels that we just experienced through the first four or five months of this year. That just looks overly pessimistic to me relative to what I see in terms of supply fundamentals and the availability of feeder cattle going forward.

SPEAKER_01 29:28

Man, Mike, I think you just bowled a strike. I mean hit the nail on the head with this episode. We got a lot covered, but I think answered a lot of the questions that people have, especially after yesterday with Rollins, but then kind of the turn we've maybe seen in the market and what this means with regards to manage money, speculation. I think you do better than anybody at kind of portraying and teaching people what that means with regards to basis and things like that. My hats off to you. That was a really good, a really good show, I thought. Do you have any final closing comments here as we start to wrap things up? We're gone over the 30-minute mark, but you know, I think today was worth it because of all the things that we had to go over.

SPEAKER_00 30:11

Well, we talked about a number of topics, with with first and foremost being the discussion about new world screwworm, and the rest of it seemed to evolve into a discussion of of some of the implications, part of which is new world screwworm, but an extremely strong basis structure in both cattle and feeder cattle. So those are the two topic areas, and we spent a good bit of time talking about each one, and as a result, maybe burden people with a little bit longer podcast this time than what would typically be the case, but I hope they'll bear with us.

SPEAKER_01 30:48

Yeah,

Wrap Up And Listener Requests

SPEAKER_01 30:49

I think they will. Um, this one I think will certainly be entertaining to watch. Yeah, if you're watching, listening, have something that or a chart that you'd like to maybe see in an episode coming up, let us know. Uh, we'd be happy to sneak one of those in for you or have a question that you'd like to be answered. Mike's the man with the answers, so we can certainly get on that. Mike, it was great talking to you as always. Maybe one of these times we'll actually get Fat Tuesday on a Tuesday, but it's always good to report the news after it happens instead of yeah, just missing it all together.

SPEAKER_00 31:23

Well, we'll have another opportunity next week to see if we can't get it done on Tuesday. Until then, have a great week, Jed.

SPEAKER_01 31:31

You as well, Mike. Talk to you next week.