Looking at Another Run Higher?

by Luke Schwieterman, President of Schwieterman INC.

Cattle on feed estimates for the March report are 102.3 percent on feed, 102.7 percent placed and 99.5 percent marketed. The trade estimates pretty much line up with the five year averages. We would guess that the marketing number will be above 100 percent since domestic use and exports continue to surprise market analysts.

Since the end of February, choice cutout has dropped $10.00 from the historical high of $198.80. It seems the market got ahead of itself by rising too quickly too early in the year. Typically live cattle top out during the first part of April along with the cutout. The cattle market over the last year has been anything but typical. The drought last summer in the central and southern US continues to show far reaching affects which shouldn’t be ignored as we enter into spring and summer.

Recall that feeder cattle were placed early and at lighter weights last fall and winter. The cow herd was liquidated in those areas from lack of pasture. What happens when we pass the bump in the feeding cycle and more or less get back to normal? Although seasonal tendencies are powerful, this year is shaping up to be interesting. The typical dip we see from spring into June may not be as deep as many think.

It appears that early bullishness has now been tempered and the market is setup to make another run higher. Whether or not new high watermarks are reached depends on higher cutout prices and continued exports. The current view is that box beef prices met resistance at the wholesale level. Chain stores and grocery stores hesitated to pay more apparently. However, retail prices are at record levels and domestic demand has not abated. We still don’t know what the retail customer will accept as too high. That opportunity hasn’t been given to them yet.

USDA, in the last supply and demand report increased projected price ranges from last month (price change in parenthesis). 1st quarter 125-126 (+4 +1), 2nd 123-129 (+3 +1), 3rd 123-133 (+2 +2) and 4th quarter price from 125-135 (+2 +2). With price projections increasing into the end of the year it is difficult to become very bearish.

The direction of old crop corn prices are more concerning. Tight supplies, the possibility that USDA will publish a bullish stocks report at the end of March and the rumors of China import needs has created a situation that foretells of higher corn prices into new crop harvest. We suggest long futures or options to cover feed needs through August.

We continue to encourage using put options to hedge cattle and feeder cattle because the pressure for live price to increase is too great.    

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

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