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Protecting costs in a bull market

By: Luke Schwieterman

Cattle continue their trek higher as this week’s trade began at $111 ($5.00 more than last week) being paid at feedlots. The squeeze between imports and exports continues with December beef imports down 23.7 percent over last year and exports up 31.5 percent. As we discussed in the last article, this shift in supply and demand is helping keep beef prices higher along with corn prices making new contract highs above $7.00

Food inflation is here to stay for a while yet. Many analysts think cattle prices and corn prices are headed higher yet. We don’t disagree. Box beef price shows some interesting features.

It appears box beef is coming into a period that would typically see prices increase and it is already at nearly $15.00 higher than last year. Should box beef prices begin to rally into BBQ season and beef production becomes less than normal, cash cattle prices could become explosive before this bull market is over.

South Korea announced today that they would remove the import tariff from pork imports on an additional 50,000 tons of pork. We are being told that they eliminated nearly 30 percent of their hog herd due to foot and mouth disease. Numbers on cattle are light but, this puts South Korea short of protein and the outlook for increased pork exports is evident. Some think increased beef exports may be in the mix as they fight food inflation with food imports. It will take a year or more for South Korea to recover their important pork industry. Furthermore, with pork prices being supported by increased exports, beef prices will see support from pork in the meat case.

Currently, the concern is more with feed costs since cattle prices don’t look like they’ll collapse in the near-term. Corn price however seems underpriced compared with the five percent stocks to usage ratio published in the last supply and demand report. USDA increased ethanol use 50 million bushels last month and may need to increase that number higher yet making ending stocks tighter. $7.00 corn has yet to decrease usage. Some have projected that it will take $8.00 to $8.50 corn to stifle demand. So, it is our recommendation that cattle producers use long futures and bull call spreads in the July corn contract to hedge feed needs. Cattle profits are at risk to higher corn prices probably more than the fear of lower cattle prices over the next six months.  ©

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

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