Feed Lot Magazine Online, Market Notes

The cattle on feed report indicated 109 percent on feed, 93 percent placed and 100 percent marketed versus last year. This report leaves indications of abundant cattle supplies into the middle of the fourth quarter. Important to note is that heifer placements remain historically large - 9 percent above a year ago. Therefore, no expansion of the cowherd is apparent.

The cattle industry has a tendency to "shoot itself in the foot." This is one of those times. Historically, when the feedyards get back up, it takes a long while for them to get current. The current cycle isn't much different from previous ones. Slaughter weights are running 15 to 18 pounds above a year ago, dressed weights about 9 to 11 pounds higher than last year. Year to date, the number of head slaughtered is only .4 percent higher than last year, however beef production is 1.4 percent higher! Essentially, we are slaughtering the same number of cattle but producing more beef. That helps the packer but does nothing to help the cattle producer longer term. It probably helps the producers in the short term by reducing losses but it just puts more beef on the market. What the industry needs to do is market cattle aggressively until it becomes current at lighter weights to help the long-term outlook. Otherwise, the outlook is more of the same -- soft cash prices.

There seems to be plenty of uncertainty in the market place. The numbers are telling us that heavy front-end supplies will keep pressure on price for a while. Some are predicting cash prices to drop into the low 60 area. We think cheap corn prices are causing producers to add weight to finished cattle and create the large supply of beef --the large supply of beef that is predicted to be coming at us over the next couple of months.

This year's calf crop is 38.9 million versus 38.7 a year ago. It is mystifying that feeder producers haven't expanded in light of good prices for feeders. Feeder cattle price has continued to trade higher longer than anyone expected and there doesn't seem to be any weakness near term. It could be that last winter's poor wheat pasture condition and the drought in the southeast has been the cause of the delayed expansion.

We think there will be pressure on the live cattle market while the large "front end" supplies are used up. There may be a good chance that cash cattle will trade in the $62/63 before the market finds the season's bottom. We were hopeful that fourth quarter beef production would decline enough that a rally in futures price would begin but the last cattle on feed report leads us to believe that we won't see improving prices until the latter part of the last quarter this year. The USDA is projecting a near 10 percent decline in fourth quarter slaughter versus the third quarter. At this point, the size of the reduction seems rather large, and we expect some revisions upward in future releases.

We tend to think that corn price may rally soon on fundamental changes in the world supply and demand. China is in the midst of a drought affecting some 18 million hectares. The loss of production may cause China to become an importer of corn rather than an exporter. Parts of South America experienced an early freeze reducing their corn harvest expectations. Granted, the US is expected to have a near record crop, however there are weather-related problems in the world that enhance the export possibilities for the US. Increased US exports could tighten US supplies enough to create the rally we are anticipating. We think cattle producers should use this opportunity to begin pricing in the corn needed for feed by buying December and/or March call options in anticipation of a 30 to 40 cent rally.

We advise all producers to buy put options on all cattle being fed and buy feeder cattle call options on any pull back in the feeder market. The risk of cash price dropping still exists and we see no reason to go unprotected.

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/ .