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U. S. beef production for the balance of 1999 is forecast by the USDA to work its way lower into the fourth quarter. In fact, beef production as forecast for the fourth quarter will be the lowest since 1995. This is encouraging news for price. Price projections by quarter were tempered somewhat from the USDA to 64/68 in the second, 63/69 in the third, and 64/70 in the fourth quarter. This reduction was due to higher than expected inventories discovered in the January 1 Cattle Inventory report. 
The latest Cattle on Feed report was construed initially by the trade as bearish with placements at 112 percent of last year, cattle on feed at 97 percent and marketing's at 103 percent. Traders overlooked the cattle on feed and marketings to focus on placements, which caught them by surprise. After the initial reaction to the report, the up trend continued in the futures and the cash market. The point is, there are still plenty of bears around to have an influence in the market. Which is good since a bull market that runs too fast generally does not last long. We continue to be bullish on cattle into the fourth quarter. Why not? Beef production promises to be down along with pork production. Poultry production is expected to increase by the end of the year but will be supported more by an improving export market than an increase in the domestic market. Speaking of exports, they continue to surpass last year. Total 1998 beef exports exceeded 1997 by 1.9 percent. Exports to Japan, the largest importer, finished the year up 8.2 percent. It is interesting to us that while the Asian economy has the "flu," imports of beef continue to rise. On a monthly basis, September 1998 was the only month to come in lower than the previous year. The export market shows promise as projections indicate an increase in 1999 of nearly eight percent over 1998. Food aid to Russia, announced last year, has yet to leave the U.S. This is good news as the delay will cause shipments to take place when beef production is declining -- adding to near term bullishness. Despite the friendly outlook, we favor covering the risk of feeding cattle by buying put options on all cattle being fed (as price insurance). One thing the last several years have taught us is that you can't trust supply and demand to always take care of itself when outside influences control a larger portion of supply and control the flow of the product itself. Until the amount of captive supplies lessens and the retailers realize that retail price is too high given supply, we simply do not trust this market. On the input side, it appears that unless a drought occurs, corn price should not be too much of a concern this year. However, the planting intentions report at the end of March may hold a surprising reduction in corn planted acres. (This report was not available at press time.) We are cautious about the grain markets even though current supplies and next year's production looks promising. We suggest you keep alert on the weather and the planting intentions report. If there are any indications that supply is threatened, we recommend buying corn call options to cover feed needs for the year. 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. |
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