Market Report and Analysis

by Luke Schwieterman, President of Schwieterman, Inc.

The December seven state cattle on feed report indicated three percent fewer cattle on feed than last year, six percent fewer placed on feed and only a one percent increase in marketings. The trend of the last couple of months of fewer cattle being fed continues. Indications in the past have been that beef production would decline as 1999 began.

The recent cattle on feed report supports that reduction. With the last WASDE (World Agricultural Supply and Demand) report, the USDA lowered their price projections to $64/66 for the first quarter, 70/76 for the second, and 67/73 for the third quarter of 1999. The reductions are due in part by the burdensome supply of pork, according to the USDA. However, the lean hog index has increased over $17.00 in the last 13 days, which is supportive of beef prices near term.

We have discussed in previous issues that we felt that increasing pork supplies have kept cattle prices from going as high as it might have (our estimate is $5.00/cwt.). It appears to us that liquidation in the hog herd is occurring at a higher pace than indicated in the December hog and pig report of four percent.

It is also becoming apparent that the effects of large supplies of pork are moving through the wholesale/retail system. After we see the supplies of pork begin to dwindle, then beef can begin to regain its market share in the meat complex.

While hog prices increased, so did February futures -- $7.00 or so. Many in the trade continue to suggest that the cattle market is due for another set back. We are of the opposite opinion. We believe beef production will begin to shrink along with pork production. We also believe that somehow, poultry (primarily dark meat poultry exports to Russia) will be restored. When all this happens at once, cattle prices have a chance in our minds to rally to at least the price ranges projected by the USDA and perhaps higher.

Over the last couple of years, cattle prices have been at the mercy of cattlemen and hog producers all expanding and producing more product that can be absorbed by the system. This supply excess has been largely the culprit in poor prices. The packers simply do not have to pay up for cattle.

Now that the meat complex is recovering from the bottom and looking forward to reduced supplies, a demand rally can begin if it hasn't already. The packing and retail industry have enjoyed record levels of profit for some time and we are certain that even as supplies tighten, packers and retailers will gladly pay more to keep the profits rolling in.

Our advice to hedgers is the same as it has been for the last year or so. If you are feeding cattle, buy put options. Although we are bullish on the meat complex, we do not trust those that more or less control the price and flow of the product. It would be foolish, in our opinion, to invest that much money and not do something to protect the downside.

Schwieterman, Inc. is a Registered Commodity Trading Advisor in Garden City, Kansas. The information herein is based on data obtained from recognized statistical sources believed to be reliable. However, such information has not been verified by us, and we do not make any representations as to the accuracy or completeness. Past results are not necessarily indicative of future results. The risk of loss in trading commodity futures contracts can be substantial. You should therefore consider whether such trading is suitable for you in light of your financial condition.