by Luke Schwieterman, President, Schwieterman, Inc.

With two positive “quick tests” in one week (both confirmed negative), one has to wonder if BSE will ever become old news. Industry leaders are asking the USDA to discontinue releasing the positive test results from the “quick test” and release only positive tests that are confirmed. The view seems to be that releasing quick test results is disruptive to the marketplace.

The Organization for Competitive Markets estimates six million dollars in revenue were lost because of the release of inconclusive test results. It is difficult to predict what USDA will do in response to the public outcry to reverse its policy.

Hopefully, the USDA will see that the marketplace is being disrupted and change their policy in the very near future. In the meantime, traders will eventually become desensitized to announcements after a dozen or so false alarms and allow the market to function more or less like it should.

The volatile limit up and down moves in the cattle and feeder cattle futures contracts makes trading very difficult. We still contend that cattle producers must cover all cattle on feed with put options as hedges or price insurance. The volatile nature of the marketplace probably doubles the cost of hedges but cash cattle selling for $90.00 or more helps offset the hedge costs.

It’s pretty obvious that cattle producers are optimistic given the price that feeder cattle are selling for. However, how long will it last and what will finally be the catalyst that puts the top in the market? We’ve all but given up on the USDA wanting to recapture the export market. What might happen is the USDA will take so long to solve the problem that Japan and others will simply find another source for cattle and then we’ll have no export market but will be expected to take cattle from Canada.

The outlook for the future, in my opinion, is that as long as the Canadian border remains closed and no new cases of BSE are confirmed, cash cattle price will drift between the high eighties to the high nineties for some time to come. If the border opens without the export market opening, look for prices to drift quite a bit lower.
If a confirmed BSE test is announced and the animal is from Canada, price stands a chance to recover from the initial sell off like the first time. If a confirmed BSE test is announced that it is a US animal, look for price to plummet on the futures market.

Producers need to create a marketing strategy that allows price to go either way while providing the possibility to capitalize on the price movement. Although options are not the perfect hedge instrument, they can provide a great deal of risk protection in an unsure environment.

Feed costs can increase from here despite the near perfect weather conditions. Even with the projected large crop, ending stocks are projected to be the tightest since 1996. It appears that all weather premium has been taken out of the futures market and now stand at a point where corn is undervalued given even the most optimistic fundamentals. There will be a lot of weather between now and harvest and with the forecast of higher demand and lower ending stocks, we don’t think corn will be able to go much lower. We advise cattle producers to buy December Corn call options to cover feed needs for the next six months. ©

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 .