Cash Cattle Post Higher Prices
Cash cattle markets finally posted higher prices over the last couple of weeks. Feedyard supplies of market ready cattle generally trend lower this time of year and we are seeing that in the showlist the last couple of weeks. Choice box beef in the past couple of years have trended higher into the end of August and we think a higher trend is likely.
Of course the big news has been the elimination of Zilmax. The effects of not feeding Zilmax will take a while to measure. But, we do know that the elimination of Zilmax will lower slaughter weights but the extent of the reduction in weights is difficult to measure at this time. The most interesting aspect of the elimination of Zilmax is the time of year it is occurring. Generally speaking cash markets trend higher into the end of the year so the possibility of tacking on a couple of dollars to live price just because of weight loss in the slaughter weights is a distinct possibility. We’ll have to wait to see how this plays out. As a footnote, hog slaughter is estimated to be reduced by 100,000 head per week this winter due to the PED virus that surfaced in May. If hog slaughter is reduced as speculated, cattle price could be supported further.
USDA trimmed projected prices in the August supply and demand report. Third quarter price projections now stand at 120 on the low end and 124 on the high end. Fourth quarter at 121 to 129. These estimates were without consideration to the change in using Zilmax. We are expecting further adjustments in next month’s report.
The supply and demand report for grains tightened things up a little. Corn ending stocks were down 122 million bushels, soybeans down 75 million bushels and wheat down 25 million bushels. Corn production, even after reducing yield 2.1 bushels per acre came in at 13.763 billion bushels – a huge crop. After the report was released, analysts expect yield to be adjusted in the next report based on better surveys of corn weights and ear counts. There seems to be the possibility of yield increasing and planted acres being reduced in the next report. Regardless of the monthly tweaking of numbers the bottom line is, a very large harvest is in the offing this year. If December corn gets as low as 4.00 to 4.50, end users might want to consider forward coverage using calls options using the March contract. Corn futures falling much below 4.00 seems unlikely at this time, but possible. Some argue that the US has lost demand because of last year’s drought however; end users will need to buy corn at harvest just to fill the pipeline. Importing countries will also find it hard to resist not trying to take advantage of low prices during harvest. It would appear that buying activity may heat up during harvest as producers look to store the crop due to cheap prices.
We suggest buying put options on cattle and feeder cattle in inventory. The market may continue higher for a while yet but options will allow you to get a floor underneath your investment.
Disclaimer: This material has been prepared by a sales or trading employee or agent of Schwieterman, Inc. and is, or is in the nature of, a solicitation. This material is not a research report prepared by Schwieterman, Inc. Research Department. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment.