Withstanding Market Volatility
by Luke Schwieterman, President of Schwieterman Inc.
It seems the cattle market lately has been the victim of excess volatility from outside markets. At the time of this article being written, the Dow is down 400 points over worry that Europe’s banking problems may bleed over into the US banking system. Without political leadership, the world seems to be on the brink of collapse from day to day. Asking prices were 116 to 117 but began trading at 114 with the Dow being down which change the psychology of the market from bullish to “a take what we can get for fear it will get worse.”
One of the primary concerns to cattle feeders is feed cost. In the August supply and demand report, USDA lowered corn yield to 153 bushels per acre versus 158.7 in the previous report. Analysts, expecting a revision to 155, were surprised at the size of the drop from the USDA. Harvested acres were reduced only 500,000 acres. Analysts tell us that yield will probably be closer to 150 bushels per acre and harvested acres are overstated about a million acres. If realized, that puts corn in a position where price will need to increase to ration demand. Some estimates are surfacing that $8.00 to $8.50 per bushel will be needed to accomplish rationing by summer. Our concern for cattle producers is that the harvest low may not be very “low.” The drought in the southern plains takes away much of the early harvest availability. Mexico, which is also experiencing the same drought, is expected to increase corn imports to make up for their shortfalls. This all leads to the need for the southern plains and Mexico to “import” corn from the Corn Belt. At this point we would advise cattle producers to begin securing/hedging their feed needs before harvest. We suggest buying futures or call options basis the March or May contract covering at least six months of feed needs if not more.
The Cattle on feed report for August indicated 107.6 cattle on feed (107.5 average trade guess), placement 122.5 (116.9 average guess), and marketing’s at 100.4 (96.3 average guess). The report on the surface was considered bearish to the further out months but the increase in placements where light weight cattle and much of this report was likely built into the market. We need to be reminded that cattle on feed reports simply tell us the location of cattle — it doesn’t increase or decrease the overall inventory on hand.
Although putting cattle in feedyards early may finish them early they will be lighter weight when finished. Producers also tell us that the very small cattle are more difficult to start. All in all, the cattle market is in good shape from a supply and demand stand point. Things to watch for is a lower box beef price seasonally and the financial markets. Should the stock market continue to falter, cattle are at risk to lower prices. We suggest either hedging cattle with futures or put options. The economic climate worldwide does not appear to be strong enough to feed cattle while being unhedged. ©
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