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Market Notes by Luke Schwieterman, President of Schwieterman, Inc. Cattle on feed are up three percent from last year, placements up two percent and marketing's the same as last year. This report continues to reflect the same old story of lightweight placements that swell feedlot inventories to the highest level that they've been for years. However, feedlots appear to be extremely current which is evident by the generally stronger cash market. On Friday, March 30, a press release announcing a possible case of Foot-and-Mouth disease in North Carolina sent a ripple through the futures market. Within 15 minutes after the initial announcement another news release indicated the test proved to be negative. We have no idea what motivated this strange and market damaging series of events but it sent the Live Cattle contracts down the limit and created a sell off in the grains. We understand that there is an investigation under way relating to the timing and the source of this press release. We can learn from that experience. It is apparent that if BSE or Foot-and-Mouth is discovered in this country (and perhaps Canada or Mexico) both the livestock and the grain market will probably sell off quickly. So quickly that we will find it difficult to respond fast enough to put hedges in place. In our opinion, should either of these diseases strike cattle, prices would plummet and it would be difficult to predict how low price would go. Even a $20 per hundred weight drop might not be enough. In Europe, where the disease exists so far, cash price has fallen and retail price has risen. The same would be likely here if either of these diseases struck our shores. We believe that the USDA has the safety measures in place to protect the U.S. However, we also know that all it takes is some misguided individual to circumvent all the safety procedures put in place. We view the threat of Foot-and-Mouth with extreme caution. The threat of BSE is probably very small. One of the largest problems in the industry is the confusion the average person on the street has about these diseases. They are inclined to think they are one-in-the-same, even though they are worlds apart. The USDA and the cattle associations should, in our opinion, increase the awareness of the American public about the true impact of both of these diseases until the public begins to understand. For the last couple of years we have recommended that all producers buy put options on cattle being fed. During that period of time most of the put options that were bought expired worthless as the cash market increased in value. That is what we want to see happen. Even though the options premium cost is lost, it is more than likely offset by the increase in the cash market. In this uncertain market climate, we think producers should strongly consider the use of put options to protect their investments. If a producer is unwilling to buy at the money options, it may be that they should consider out of the money options until these diseases lose their market impact. We refer to this strategy as "sleep insurance." A relationship might be health insurance with a big deductible - protection from a possible big loss. All in all, we are still bullish in the cattle market. Barring any outside influences such as Foot-and-Mouth or BSE, we think there is a good chance cash cattle could trade in the mid $80 range in the weeks ahead. But, we are very concerned about the uneasy market as a result of Foot-and-Mouth and BSE in Europe. As long as the disease problems stay isolated in Europe, the general impact would be bullish cattle prices in the U.S. since our export prospects increase. The economy is still unsettling, as very slow progress is made on the tax cut. And energy prices are eroding discretionary income. We are hopeful that the tax cut will be passed soon and look forward to turning off the furnace for summer which will help improve discretionary spending. 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. |
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