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The last month or so has been very interesting as plenty of bearish news has been absorbed by the market place and price continues to firm or even improve. The USDA Cattle on Feed seven states report for September indicated 105% on feed, 117% placements and marketing's at 103%. Deemed bearish by traders the market recovered several days after the report. We believe the market is responding to simple economics - there is less beef on the horizon. Beef production in the 4th quarter of 1999 should drop, according to the USDA, eight percent from 3rd quarter levels. This is a record drop in that previous reductions have been less than six percent since 1994. A further drop of over two- percent should follow in the 1st quarter of 2000. Encouraging to producers is production will be declining during a period of seasonally increasing beef consumption. Demand seems to have the trade confounded since record amounts of beef were being consumed this summer at near record wholesale and retail price. Part of the unexpected demand is coming in part from growth in "upscale" restaurants where demand for better cuts of beef leads the way. We think this trend will continue as long as the economy remains robust. Even though the stock market has been in a correction phase over the last couple of weeks, we are of the opinion that the economy is strong enough to continue its upward momentum. What happens in the stock market from day to day is not as important as the underlying fundamentals of new housing starts, rate of unemployment or the economic recovery of the Pacific Rim countries. Exports for beef have been "soft" (except for Russian food aid). We expect exports to increase as the economies of the Pacific Rim continue to improve. On the import side, we've noticed reduced cattle imports but an increase in beef imports from Canada. It could be that Canada is avoiding conflict by sending us beef instead of cattle. The US consumes about two percent more beef than it produces. It is quite amazing how much "press" that two- percent gets sometimes. It may be time to begin thinking about the total picture - North America instead of just the US. 
The hog market continues to liquidate as confirmed by the most recent Hog and Pig report. The losses in North Carolina of an estimated 40,000 hogs gave further support to price. We've noticed a certain amount of "spillover" effect in the cattle market from the bullish news in the hog pit. Lately it seems that bad news really hurts and good news only mildly supports price but that is beginning to change. Since both cattle and hogs are in the liquidation phase, we think the cattle market is running out of reasons not to go up. We suggest that cattle producers continue to buy put options on all cattle being fed. The amount of cattle being sold under predetermined pricing arrangements (captive cattle) continues to increase as a percent of the total. We feel that as long as this trend continues, some type of offsetting risk tool should be used. Contract arrangements, in our opinion, limit your profit potential and we question if some of these contract arrangements limit your risk. Using put options to reduce downside risk or call options to open the topside back up seems to be a conservative way to offset the risks of a risky business. Feeder cattle prices are a two way street. If you are a cattle finisher, we would suggest buying feeder cattle call options to cover your needs for the next three or four months. The large placements of small cattle earlier in the year will probably make available feeder cattle in the near term tough to achieve without paying an out of proportion price. If you have grass cattle or intend to put feeder cattle on wheat pasture, we suggest buying put options to cover your breakeven or profit. Feeder cattle price is a function of live cattle price and the price of corn. We think cattle price is going up but corn price is undecided at this point. (c) 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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