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The June seven State cattle on feed report showed three percent more on feed, one percent fewer placed and marketing's only slightly below 1998. We believe this last report from the USDA confirms that liquidation is taking effect and gives us hope that the worst is behind us. Admittedly, cash has dropped a dollar or two and will probably drop to the 60 to 62 dollar area before the summer low is posted. After all, seasonally cash cattle trends tend to drop into mid summer before the fall and winter rallies typically occur. The cattle market has been able to absorb a historic drop in Lean Hog futures price. We cannot recall a time when hog futures have dropped limit down four days in a row after a report. Despite the over reaction to the downside in the hog market, the cattle seem to have effectively separated themselves from the burdensome supplies of the competing meat. That's good news for the cattle market since beef production is projected to drop into the first quarter of 2000. We still think there is good chance cash cattle can trade in the 70 to 72 dollar area before the end of the year. However, we would be irresponsible if we did not make you aware that it is important to be skeptical about promising fundamentals. Producers do not control this market yet, and there are still problems with captive supplies and the ability of packers to control the "flow" and psychology of the market. Even though feedlots are current, the packer buyers seem too able to influence the cash market by buying all the cattle they need within a few hours each week. Until the weak link in the chain is overcome, there will continue to be a struggle each week to see who caves in first and sells their cattle. This starts a snowball effect generally creating lower prices. We're not poking fingers in any particular direction. We're trying to say that the marketing climate has changed over the last few years. The ability of supply and demand to determine the cash price of cattle has deteriorated to the point that lack of supply does not seem to increase cash prices as it once did, and excellent demand doesn't seem to pull cash prices higher either. We've discussed in the past how a "significant event" is needed to change the psychology of the market in favor of the producer. Despite the manipulation that seems to go on, supply and demand will ultimately win. We think that once supplies become tight enough and packers realize they have to bid against one another to keep their chain running at full speed, the cattle producer will regain control. There is no doubt in our mind that if producers would have kept themselves in the free market instead of the contract market this change would have occurred much earlier. If you are contracting cattle, we suggest buying call options on cattle so that you can participate in price increases. Once you sign the contract, you've lost the ability to gain when cash prices increase. We also continue to encourage producers to buy puts on all cattle being fed as "price insurance." This sounds like we're talking out of both sides of our mouth but we continue to be cautious with this market. Should corn price continue to erode and cattle price continues its up trend, we think feeder and stocker cattle could get expensive. We suggest buying feeder cattle call options on cattle you intend to place in the feedlot later. 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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