The USDA announced they would change the procedure used to announce inconclusive BSE tests to the public. The two inconclusive tests found at the end of June caused such an upheaval in the market place that these changes are justified. Under the new format, if an inconclusive test is found, a second test will be run. If the second test is reactive, an inconclusive test will be announced to the public and a confirmatory test will be run at the National Veterinary Services Laboratories in Ames Iowa. These changes should be for the better.
It is important that we consider the idea that it is probably only a matter of time before another positive BSE test takes place. After all, prior to the discover of BSE in a Canadian cow, the U.S./Canadian border was very porous to cattle movement back and forth. It seems odd to us that since the discovery of that “one cow” and two false BSE test at the end of June that there have been no other discoveries. Could it be that we discovered the only one in North America? Probably not.

An amazingly strong market has followed the discovery of BSE in May 2003 in Canada and December 2003 in the U.S. In the first week of August we show the following for the “practical top” for cash price: 1997 -- $65.00; 1998 -- $60.00; 1999 -- $65.50; 2000 -- $65.00; 2001 -- $69.00; 2002 -- $63.00; 2003 -- $80.50; 2004 -- $83.00.

It appears the cash cattle market is somewhere between $15 and $20 better in August than before the occurrence of BSE. The outlook into winter could be higher if the Canadian border remains closed. Indications are that there is no wave of cattle expected from Canada once the border is open. Supplies in the U.S. however have been disrupted because of the import ban. When supply is disrupted, price stays high enough to ration the remaining supplies. Once supplies are reestablished, prices should fall to levels allowing demand to increase. We tend to think the on again, off again talks with Japan will linger on for several more months. They don’t seem to be in a hurry to resolve the issues and neither does the U.S. U.S. producers are probably of the same opinion – why resolve the issues with Japan with cash prices like they are. Keeping the borders closed has obviously benefited the producers.

The USDA released the August supply and demand report for grains and boosted corn production to 10.923 billion bushels. This huge increase is providing cattle producers the opportunity to lock in some very cheap corn prices. We tend to think the crop won’t get bigger in the USDA reports from here on out so in our opinion, major lows are about to take place in the market. This will be a great crop but we can’t help but believe that there will be pockets of disappointing yields that will reduce the optimism in the USDA balance sheets over the coming months. Soybean production was reduced 63 million bushels and the futures market popped up over 30 cents in reaction.

This just shows how the grain markets boom or bust mentality can turn markets around. We suggest that producer’s hedge all feed needs for the next six months using December or March corn call options on this bearish reaction to the most recent supply and demand report.

As far as cattle are concerned, producers are advised to have put option protection on for all cattle on feed. Recent volatility has increased the cost of put options but the more you have at risk the more it is going to cost to offset some of that risk. All in all, we think the cattle market is in good shape but have learned from past experience that when we get too comfortable things tend to change. Use rallies to get that protection on. ©

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