Up Up & Away

By: Don Tyler

Last year at this time, cash cattle were bringing $125 per hundred weight. Last week Kansas cattle sold for $145, roughly 16 percent higher. Asking prices are 147 – 148 this week. It’s been an amazing time and looks to become even more so. In the February USDA Supply and Demand report, first quarter price estimate were raised from 130 – 136 to 137 – 141. Second quarter estimates are now 132 – 140 an increase of five dollars on the low side and three dollars on the high side. It appears USDA is trying, like the rest of us, to get a handle on where price is headed.
In our view, the bullish cattle market is far from over. The drought brought unforeseen consequenes at the time and now the market is attempting to find a price that will ration reduced supplies. What may complicate the current market is the drought that is occurring in California. It sounds like they are running out of water and will have to liquidate herds including cows in the milk industry. Also, the PED virus in the hog industry has death loss estimates in the four million head range by the National Pork Producers Council. A shortage of supply in both beef and pork at the same time supports each other’s price. 
Box Beef price is starting to recover after a 15 dollar drop from all-time highs. Presently, choice beef is 30 dollars above last year at this time, pretty much in step with cash cattle price. Retail prices moderated in January. Choice retail price was 534.6 compared to 536.0 the all-time high reported in December. It appears retailers are tempering the erratic price movements of cash and cutout prices. How long retailers can hold prices down is limited in our view. One of the primary drivers in the retail market is hamburger. We’ve become a “hamburger nation.” Prices for 90CL Boneless Beef Prices have risen 31 percent since the cycle low in the fall of 2013, according to Steve Meyer and Len Steirner of the Daily Livestock Report.
Even with all the tools we have available to anticipate futures price, there is little to base price outlooks on when markets trade at all-time record highs. Fat cattle value is based on the cost of feeder cattle, the price of corn, and fixed costs. The price of fat cattle is based on supply and demand. We currently have a situation where demand is out of balance with supply. We believe this bull market is only beginning and may go places not yet imagined. However, the producers job is to try and enhance the bottom line. We continue to recommend buying put options on cattle being raised. Put options create a floor price and if cash prices improve, producers are able to benefit. 
The corn market has rallied 40 cents since the first part of January. Lack of farmer selling, a supportive soybean market and a good corn export market has allowed this market to show some strength. We believe this market will likely trade in a 50 to 75 cent trading range until more is known about next year’s outlook. What we find interesting is that many of the analysts think corn price should/will trade below $4.00 but corn price is showing tremendous resistance to that idea. We wonder if we haven’t put the low in for the year on old crop. We would encourage cattle producers to buy call options on feed needs when there are pull backs in the futures price. Watch the situation in the Ukraine. If the turmoil continues it may affect their grain exports and since they are keen competitors in the grain export market, it may send export business our way.    
This material has been prepared by a sales or trading employee or agent of Schwieterman, Inc. and is, or is in the nature of, a solicitation. This material is not a research report prepared by Schwieterman, Inc. Research Department. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. The information contained herein is based on data obtained from recognized statistical services and other 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. All statements contained herein are current opinions which are subject to change. You may visit our web site at www.upthelimit.com

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