Imports contribute to bull market
By: Luke Schwieterman
The bull market continues into October. Exports were 30 percent higher compared to August of last year. Year to date, January through August, exports are over 27 percent higher than last year. Imports, on the other hand, were down 9 percent compared to August and year to date imports are down nearly 16 percent. Of the four largest countries the U.S. exports to, Mexico was nearly flat year to date, Canada up 38 percent, Japan up 22 percent and South Korea up 50 percent. The U.S. has become a net exporter of beef which helps explain why overall demand is increasing while domestic demand is relatively flat.
The U.S. finally passed the free trade agreements with South Korea, Panama and Colombia that have lingered in Congress for years. The passage of the FTA agreements promises to increase beef and pork exports to all three countries especially South Korea where currently they pay a 40 percent tariff. The tariff will be removed in 15 equal annual increments until it reaches zero. The increase in exports may be felt as early as January next year. The basic benefits to the agreement are increased exports to South Korea as they begin to enjoy lower prices for beef. However, U.S. prices may increase as the increased demand tightens short supplies.
In the October USDA Supply and Demand report, imports for 2011 were lowered 4 percent (80 million pounds) and exports were raised 1 percent (25 million pounds) from September’s report. 2012 imports were a whopping 13 percent (320 million pounds) and exports raised nearly 7 percent (180 million pounds). So, the import/export squeeze we’ve discussed frequently looks to continue into next year. These changes in the import/export outlook will be supportive of live cattle price.
In fact, USDA increased 1st Quarter price estimates $2.00 from 108-116 to 110-118. Second Quarter price estimates were unchanged at 110-120 and new 3rd Quarter estimates are 113-123. Quarterly production estimates are down across the board. Production for the 1st quarter is down 4 percent from last year, 2nd quarter down 3.5 percent and 3rd quarter down 4.8 percent. These estimates were published before the passage of the FTA agreements. We expect additional changes in next month’s report.
The cattle on feed report for October indicated cattle on feed at 105 percent from a year ago, placements at 100 percent and marketings at 101 percent. Producers continue to place cattle early and lighter due to the drought in major cattle feeding states. Marketings at 101 percent at record high retail prices indicates to us that demand continues to be good.
Our recommendations are to buy puts or sell futures on cattle being fed. The futures market is presenting hedging opportunities and will probably trend higher over the next few weeks. We continue to be friendly cattle and feeder cattle price. Feed costs are likely to rise after corn dropped nearly $2.00. We would suggest buying corn call options to cover feed requirements.
Disclaimer: 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 our web site at www.upthelimit.com