Cash and futures markets have recovered somewhat from the lows posted in late May (about $5.00). The price wreck that started with the Holton, Kansas rumor of FMD and the general weakness in the stock market has made it difficult for market bulls to stay confidently bullish. And who can blame them when almost everyday brings more bad news involving businesses that have been less than honest about their balance sheets. It is one thing to be attacked from the outside but it is another to be attacked from the inside. We firmly believe that the economy will improve especially the agricultural sector. The new farm bill promises to put a lot of money into the Ag economy even if prices falter. Right now it looks like farmers may be given a chance to sell their crops at prices that we haven't seen for several years.

The seasonal tendency for cattle price to increase from now into winter. The USDA currently projects the average cattle price for the third quarter to fall between $62 and $66. For the fourth quarter, the range is $70 to $76. We think the third quarter could be a little better than the USDA numbers but we aren't willing to quarrel with their projections at this time. The meat industry is looking closely at three things. Cattle and beef imports from Canada and Mexico, pork production in the third and fourth quarters and the Russian ban on poultry imports. Pork and poultry could out-compete the beef. But, our experience tells us that projections that far out rarely happen. The dollar has dropped dramatically so imports from Canada are less profitable. Poultry production can be modified quickly so that a glut does not occur. However, each product is looking to garner their share of sales out of the meat case so competition will most likely be intense this fall and winter.

Slaughter weights running 20 plus pounds above a year ago still burden the beef market. The reasons for the high weights are varied but one of the best signs of a bull market will be when weights drop below year ago levels. Placements and yard inventories are beginning to drop and that is a good sign. However, we worry about the current drought causing massive liquidation in the cowherd inflating inventories short-term. Should liquidation occur in a big fashion it would be bearish short-term and bullish long term.

Despite the various problems in the cattle and beef market, we think we will see some improvement in price into fall and winter. But we are still cautious enough to recommend that producers should buy price insurance in the form of put options to offset some of the risk of owning cattle. Feeder cattle will see some pressure from rising corn prices and should also consider the put options. For those with feed requirements, we suggest buying December corn call options covering the next six months of feed needs. The corn market is pricing in a weather market indicating that supplies could be at risk. Offset the options as you sell the cattle or take delivery of the corn. ©

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