by Luke Schwieterman, President of Schwieterman Inc.
Today the Commerce Department announced that a tariff on live hog
imports from Canada would be imposed which sent the Lean Hog futures
contracts up the limit. The tariff, from our understanding is on the
live hogs not the meat. In our opinion the tariff won’t make
any difference in the amount of meat or live hogs that cross the Canadian
border into the US. The Canadians increased their hog production to
meet US import demand, and they really don’t have any place
to go with the production. Although it appears to be bullish in the
near term, imports will likely continue as in the past.
Hog demand has increased in large part due to the closing of the Canadian
border to cattle and the increase in US pork exports to Japan and
Mexico. Should the Canadian border open and/or the exports resume
to Japan, we believe that near term the futures market would experience
a sell off. The futures market as well as the cash market is very
sensitive to news – good or bad. This sensitivity is creating
so much volatility that many hedgers and traders feel uncomfortable
with their positions. The ability to predict the direction of the
market has become dependent on the “next” news story.
We are hopeful that prices continue to stay at profitable levels,
but we are nervous for producers who do not have some type of downside
protection in place.
The USDA, in the October Supply and Demand report, indicated the US
would produce an amazing 11.6 billion bushel corn crop – record
in size. In that same report, the average cash corn price for the
year was reduced 25 cents within a range of $1.75 to $2.15. Producers
should be watchful for a harvest low in corn to be posted within a
month or so. At that time we suggest producers buy call options covering
at least six months if not a year’s worth of corn to cover feed
requirements. Even though the crop is huge and the price low we do
not think prices will stay cheap. Demand is also expected to be high.
Ethanol production will increase. In other words, we’ll slowly
use it up and prices will increase over the longer term.
For cattle producers, the question of when Japan and the U.S. will
resolve the ban on meat exports is still not answered. The ban has
lasted far longer than most anyone expected. The odd thing about the
situation is that the U.S. cattle producer has benefited, so why encourage
a resolution. It seems inevitable, however, those compromises will
be made and exports resumed someday in the future. For now, we suggest
that producers cover the downside using put options on all feeder
cattle and fat cattle being fed. Although we think the cattle should
remain strong throughout the winter, we don’t think producers
should put their fate in the hands of the USDA and Japanese negotiators.
©
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.
