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Marketingys for April were five percent more than last year in the latest USDA Cattle on Feed report. Placements, however, were up a whopping 22 percent from a year ago (the average trade pre-report estimate was up 16 percent!) On the surface, this appeared to an extremely bearish report, however traders seem to like the marketing number enough to trade futures higher after the report. Currently the futures market has fallen some. Cash has remained in the $65.00 to $66.50 area since the last issue of FEED?LOT. Beef and veal exports for February (most recent data available) exceeded last year. It is significant in that exporting more beef than we import on a monthly basis is a rare event. The last time it happened was 15 months ago. This does not include any shipments to Russia for the food aid donation. In fact, we have been expecting to hear about tenders for beef shipments to Russia for some time now, but we have yet to see any happen. We are beginning to wonder if it will. After all, the original announcement came last fall. What may happen is the trade will not react either way when tenders are announced after being bored by all the anticipation of upcoming shipments that donyt occur. The good news is if/when shipments occur, it will be at a time when beef production is beginning to decline. The USDA indicates that beef production in the fourth quarter will experience the largest drop from the previous quarter in the last five years. At 6100 million pounds, fourth quarter beef production will be at approximately the same level as the fourth quarter of 1996, which supported an average live price of $70.50. It is also interesting to note that choice beef cut out values are at the same level. In our opinion, we think cash cattle in the fourth quarter could reach prices of $70.00 to $72.00 given current fundamentals. Slaughter weights appear to be coming down. We think that weights will continue to decline as supplies tighten. However, producers could do themselves a favor and get even more current than we are and accelerate the eventual decline in beef production. The same packers chasing fewer cattle will help price rise. Weyve seen this phenomena in the hog market during the last couple of weeks. Cash hog price has increased $7.00 per cwt only because there are fewer hogs. We are fairly confident the same thing will happen in the cattle market and probably during the fourth quarter in anticipation of the decline in the fourth quarter. Thatys promising news for cattle producers. But that doesnyt mean that you should not use risk management tools. It maybe more important now than ever. We have to admit to ourselves that the way cattle are marketed has changed. The overall psychology and fundamental relationships of what make up supply and demand seem to have changed over the last three or four years. Once we accept that things have changed, we are prepared to take the defensive action to help insure that we can keep our investment capital together. Hedge strategies are as numerous as producers are. Each strategy must be custom fit to each producer. Essentially, we think the best basic way to protect yourself is to buy put options on cattle that are being fed. Should you contract the cattle with the packer, buy call options to open up the topside for possible price improvement. At least with this simple strategy, you have some insurance against price erosion. 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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