The Corn Factor

By: Luke Schwieterman

The big news in the USDA July Supply and Demand report was corn ending stocks estimated at 870 million bushels which is 175 million more than a month ago but 143 million bushels less than the average trade guess. We have to go back to the June 30 stocks report were USDA “found” 346 million bushels of additional inventory. The trade worried that ending stocks would exceed a billion bushels. The planting report in June also increased corn acres 1.6 million acres which exceeded anyone’s expectations since many of the Corn Belt states were having a difficult time getting the crop in the ground by June 1.

Shortly after the planting report, USDA announced they would resurvey four northern states in July and report adjustments in the August report. In conclusion USDA attempted to redeem themselves by making enough revisions to half the 346 million bushels they “found.” Looking forward, we think the June report may have been more accurate and further tightening will be seen in the August report. Until then, weather will be the main concern as dry, hot weather has established itself over the Corn Belt. It appears now that corn price is likely to make another bull run this summer as a weather premium is built in.

Cattle price is on the rise with last week’s price at $115 and asking prices this week at $118. Cutout prices are defying gravity as compared to last year.  The southern US is in a serious drought that is causing early placements of feeder cattle and liquidation of cow herds due to the lack of pasture. Many producers are beginning to worry about the possibility of not having enough moisture to plant

The drought is going to make it difficult to rebuild herds if rains don’t occur soon and if producers are able to rebuild herds supplies will tighten as cattle are taken off the market. It may take a couple of years before we see a more normal cattle market as a result.

In the meantime, exports continue to be excellent and domestic demand does not appear to be as bad as some report. There is always plenty of talk about consumer resistance at the meat case but I don’t think the retail consumer has really been tested to see where that resistance occurs. Most of the resistance so far is from grocery stores that may have to raise prices in the meat case. USDA quarterly price projections are 3rd quarter 2011, 111-115, 4th quarter, 110-118, 1st quarter 2012, 110-120 and 2nd quarter 2012 112-122. These prices may be understated if the drought continues.

Our recommendations are to buy put options on all cattle being fed. Buy feeder cattle call options on intended purchases. Buy corn call options to cover the next six months of feed use. It wouldn’t be surprising to see $130 fat cattle and $150 feeder cattle prices later this summer on the fundamentals we currently have. However, the flip side of the bullish market is the worry investors have over the European financial mess and the inability of Congress and the President to cut programs. That’s why we are suggesting options in our risks strategies. ©

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 upthelimit.com

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