It’s all about inflation

By: Luke Schwieterman

In Econ 101 we learned that inflation is too many dollars chasing too few goods.  That seems to define the commodity market at the current time.  Supply is unable to keep up with demand. In the US, beef imports are lower and exports are higher.  USDA just released the import/export report for February (this report is delayed two months). Imports for February were down 16.5 percent from last year and down 6.2 percent from January.  Exports however were up 25.4 percent from last year and up 14.2 percent from January.  The most notable export increase was South Korea up 51 percent as they compensate for the foot and mouth disease that decimated their cattle and hog herd.  South Korea will likely continue to import meat and Japan will join in as they both attempt to compensate for their localized difficulties.

China’s insatiable appetite for nearly everything increases input costs, which have soared. Gasoline, fuel, feed and land values have all increased enough to keep cattle prices at present levels. No herd expansion is evident yet. Some producers would like to expand but can’t because no grass is available due to drought. The drought encompassing the south central part of the US comes at a time that may eventually cause further herd reduction.

Where does this lead us?  If the cash market is any indication, it looks as though prices at these levels will be with us for a while yet.

Choice box beef and cash cattle price are both $23.00 higher than a year ago. However, both charts indicate that we may see the tops come in during May. Then the typical pull back into June may begin.  We would recommend you consider cattle and feeder cattle hedges as the highs are challenged.

Market analysts are telling us that old crop corn price has to go higher to ration the meager supply we have left.  Some have proposed prices between $8.00 and $9.50 as a price level that corn needs to achieve to ration demand.  We suggest that you give consideration to buying either futures or call options to cover feed needs to last until October. Corn supplies are projected to be only eight days of inventory by the end of the crop year. Something has to give and it will probably be higher prices before demand begins to slow.

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