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We view 1999 as a turning point in the cattle industry as it completed the liquidation phase of the 10-year cattle cycle. Now begins the expansion phase.  Could it be different this time than in the past? We don't think so. Markets are the results of two emotions. Fear and greed. After several years of losses, fear sets in and the liquidation begins. Once fears subside, greed takes over and the expansion cycle begins anew. Last year, according to the USDA, should have been fairly profitable for cattle producers. Not as profitable as it should have been in our opinion, but profitable none the less. Cattle prices have improved, and feeder cattle prices have improved at a faster pace. That's an indication to us that greed is beginning to set in. More producers chasing fewer cattle. This is not necessarily a bad thing. What we are concerned about is marketing the cattle in a way that when prices decline, producers are protected to survive the tough times so they can still be around when it gets better. The export market has promise to be an extraordinary feature in the year 2000. After all, where else is beef the safest in the world? It appears to us with world economies expanding, that beef exports will increase to the point that the US will export about the same as it imports. However, should the US economy begin to contract (we don't think that will happen) or world economies have a setback, exports will be the first to suffer. This fall, domestic demand ran counter seasonal to the norm. New millennium parties and hoarding in preparation for the year 2000 was claimed to be the reason. We felt all along that using the arrival of the new millennium to explain beef demand was a stretch of the imagination. We do find it hard to understand why the news media won't accept the fact that domestic demand is coming from 1) more fast food restaurants, 2) increased high scale restaurant demand and 3) an American public that is simply eating more beef. We think there will be strength in the year 2000 where there was weakness. The last cattle on feed report indicated record levels of cattle on feed and placements in feedyards.  The record levels came from cattle weighing less than 700 pounds. The lighter cattle are being driven to the feedyards because of the extended drought in the winter wheat areas of the US. These cattle will reach finish weight much sooner than if they would go through the normal pasture process. There is a possibility these cattle could be moved back out to pasture, but we think that cheap corn prices will keep the cattle in the feedyards. So when April comes, there could be an increased number of slaughter cattle available, however, the slaughter weights should be lighter than a year ago. If this plays out like we think, August will have fewer slaughter-ready cattle and could become a big surprise to the market place.Our hedge strategy for the year 2000 is to take advantage of the opportunities the futures and options market offers. We feel that this demand led market will probably peak in the second quarter in the 74 to 75 dollar area. There are possibilities this market could go much higher if world economies continue to grow. Until the January inventory report is released, (unavailable at press time) it is difficult to project the last half of 2000. Seasonally, this would occur during the March/April period. At that time we want to aggressively hedge cattle using put options for the third and fourth quarters. In general however, we have reason not to trust this market. We think it should become every producer's standard operating procedure to buy put options on all cattle being fed. That way, if prices drop dramatically, they are protected. The argument we hear the most is that options don't work. In this strategy, you don't want them to work. If the put options make money, it means cash dropped - sometimes significantly. Producers must think of put options as price insurance that you never want to collect on -- but can if a wreck occurs. 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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