by Luke Schwieterman, President of Schwieterman, Inc.
We are growing suspicious about the cattle market in relation to
the Canadian border opening in a couple of weeks. Despite the lawsuits
that are pending at the moment, the rhetoric out of the USDA gives
the feeling that the opening is inevitable. Analyst for the cattle
market are split in their opinion about whether or not there is a
“wall” of cattle ready to export to the US. The market
is not reacting as we thought and actually seems to be shrugging it
off. However, the markets perception towards price can quickly change.
Prior to the discovery of BSE in Canada and the US, beef imports amounted
to about five percent of the total beef production while live cattle
imports added an additional five percent. Currently, beef imports
have are at about the same level as 2003. Therefore we can probably
expect about a five percent influx of live cattle once imports begin,
but undoubtedly there could be some backlog of supplies in the near
term.
In our estimation, it will take time for the flow of exports to develop.
The requirements, paper work, age limitations etc. have to be met
and of course there needs to be willing buyers in the U.S. to take
the cattle.
Many feedyards and producers are concerned about what happens to them
if another case of BSE is traced to siblings in a feedyard feeding
Canadian cattle. Is the feedyard with Canadian cattle going to be
quarantined and will the cattle be identified well enough to quickly
resolve the issues? Will a feedyard lose customers if they feed Canadian
cattle? It appears that the opening of the Canadian border may create
more questions than answers for U.S. cattle producers.
What we do know is that producers have more capital at risk than in
the past. Cattle values are at historical levels, which in our opinion
justifies the increased need to offset the price risks with put options.
In a worst case scenario, cattle prices could decline 10 to 30 dollars.
Feeder price could drop even more. In the best case scenario, the
industry is experiencing a willingness by consumers to pay high prices
for beef and the Japanese will begin to accept U.S. exports, allowing
cattle price to remain high. Rather than bet on the market to continue
providing high prices, we would prefer to create a win-win hedge strategy
to protect producers from a possible price collapse and preserve the
capital they’ve worked so hard to obtain. So, we suggest producers
buy the put options on all cattle being fed and all feeder cattle
that they own. Then the market can do what it needs to do and the
producers can sleep a little better at night knowing they have their
assets protected.
The corn market is at price levels not seen for several years. The
outlook, according to most analysts seems favorable for prices to
remain cheap for some time to come. However, history has taught us
that “cheap prices cures cheap prices.” We sense an opportunity
to capture some cheap prices knowing that prices will not remain cheap
forever. We suggest covering at least six to nine months of feed needs
by buying December corn calls or bull call spreads. Although we are
being bombarded daily with analyst telling us corn can’t trade
higher, we know from experience that weather problems or new demand
whether it comes from increased corn exports or ethanol expansion
could be the catalyst to higher prices
All in all, we are hopeful that developments evolve which allow cattle
prices to remain at profitable levels. However, producers are facing
the reality of the Canadian border being opened with a market that
is not showing much for direction. Making the decision to do nothing
could be disastrous.
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. ©
