Feed Lot Magazine Online, Market Notes

Before discussing the promising cattle market, I'd like to alert cattle producers to the opportunities the market is giving you to capture cheap corn prices before next fall.

First some background. This year has been unusual in that some of the areas of the US are or have been in a LaNina drought. The eastern cornbelt is almost too wet while much of the western cornbelt continues to be dry. Traders have taken advantage of the old axiom, "rain makes grain," and sold off the futures market to near historic lows. I question whether these low prices can continue into harvest and think that now would be a good time to take advantage of these lows to capture next fall's crop.

How the market got this cheap is a series of occurrences that gives the perception of a plentiful crop. The crop may be plentiful when it is all said and done, but "how plentiful" will determine the price in the future. The USDA in the OUTLOOK conference indicated that the use of trend line yields would give the US a near record crop. In its first supply and demand report for corn, the USDA used an average yield of 137 bushels per acre for the US, somewhat higher than trend line yields. The USDA sighted early planting with few delays as the reason for the uptick in yields (I found it interesting that no reduction was penciled in after having the warmest winter in 104 years!)

Some in the industry are hinting that even the acreage planted is suspect in the supply and demand report because the superior planting conditions enabled farmers to plant areas not generally planted during a normal year. NOAA entered the picture by releasing their drought monitor, indicating the areas of the country that were under various degrees of stress. Analysts disregarded the announcement as nonsense since weather forecasters have enough trouble forecasting tomorrow's weather, let alone attempt to forecast droughts.

I think it will be extremely difficult to achieve the second highest yield in history. In order to achieve this lofty level of production, the US must have near greenhouse weather over the entire country. Crop condition reports and NOAA's Drought Monitor indicates to me that we are not experiencing near perfect weather. Therefore, I question whether or not 137 bushels per acre can be realized. As far as more acres being planted, I'm sure there were, but their being drowned out as this is being written.

The weather has been interesting to watch. The US may experience floods in the eastern corn belt, while the western corn belt continues to suffer from drought. I've heard comments about how Nebraska is 70 percent irrigated and only 30 percent dryland (I guess the conjecture is that Nebraska will produce corn at record levels since they have all that irrigation). I know from experience that nothing replaces rain. Irrigation helps, but in 100-degree heat with high winds, corn still shows stress even if standing in water.

The bottom line is, the USDA along with industry analysts have promoted very optimistic production levels for this years corn crop that I don't think can be achieved. Especially given the variety of weather extremes in the US and around the world. It appears to me that corn prices could have a 50 cent rally such as we saw after the 4th of July in 1991, 1997 and 1999 as the market place begins to understand that too much optimism has been built into the price as we enter the summer months.

The cattle market was shocked by the size of the last cattle on feed report, which indicated 109 percent on feed, 115 percent placed, and 110 percent marketed. This report continued to confirm that cattle are being placed in feedyards at record levels in response to poor pasture conditions and cheap corn. Feeder cattle prices are amazingly high in consideration of fat cattle prices. I think the spread between live cattle price and feeder cattle prices will begin to narrow in the near term.

The July 1 Cattle Inventory Report (released July 21) may shed some light on how we've been able to have such large placement rates with 2 percent fewer cattle as reported in the January Inventory Report. Not only has the cattle market been burdened with record levels of cattle on feed, but also heavy slaughter weights have kept beef production at nearly the same level as last year. Some of the numbers are not adding up, and only time will bring the discrepancies to the surface. One of the best things going for the cattle market right now is that there is no indication of expansion in the cowherd. Producer restraint from expanding is surprising.

I suggest cattle producers consider buying December corn call options or futures to capture the cheap corn prices, as I anticipate that the seasons low is about to be posted. I also think you should buy put options on all cattle being fed. Although I don't think we will see a large drop in fat cattle price that some predict (up to $6.00 in the next month or so) the possibility still exists. With most of the profit margin for cattle producers out of the market, I think it is wise to limit possible future price erosion. Longer term, I am optimistic on cattle prices. The fourth quarter could, from the fundamental data I've seen, produce a welcome surprise. The possibility of higher prices for the balance of the year may be influenced more by rising energy costs than retail beef demand. Every additional dollar spent for gasoline takes away from discretionary income. If the market begins to perceive that beef demand is hurt by high-energy prices, this market could falter on perception alone rather than fact.

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. You may visit their web site at www.upthelimit.com .