Projections and Pricing
In the March Supply and De- mand report, USDA revised slightly their projected quarterly beef price and production estimates. Currently, USDA projects a 3.2% increase in production this year over last year for the 1st quarter , 4.4% increase in the 2nd quarter, 4.9% increase in the 3rd quarter and 1.8% increase in the 4th quarter. In review, years 2014 and 2015 record reductions in beef production, caused by drought induced liquidation of the cow herd, nearly nationwide led us to this year — a year of rebuilding. It takes years to recover so production in 2016 is still less than years prior to 2014.
Projected price bands, according to USDA, are as follows: 1st quarter 132 to 135, 2nd quarter 136 to 142, 3rd quarter 132 to 144 and 4th quarter 133 to 145. Frankly, it is difficult to project prices the further out you go. But it is apparent that doomsday is not being considered by USDA at the present time. It is interesting that the futures price is well under USDA projections. Perhaps the marketplace knows something we don’t. What we think we know is Australia and New Zealand will likely export less beef to the US since they have experienced their own drought. Retail price is not drawing down near as fast as cattle price which could be affecting demand (though we doubt that since we eat it all). Competing meats are decreasing demand for beef (we think the affect is smaller than argued).
Bottom line, production is increasing so rallies in the market will likely be sold. Use rallies to hedge production using options. At the money options, in our opinion, are a better choice in this market climate because fundamentals change so rapidly. In other words, something could happen in the world marketplace that causes an unexpected significant rally. Options give the hedger the best advantage of both up and down markets. If the market goes down, the hedges are protecting them. If the market goes up, the hedger gains in the cash market.
The corn market looks sideways to us. Unless there is a significant weather event, price is likely to move sideways. However, the funds are very short the grain markets and if they decide to buy their way out of their short positions, an unexpected rally would be the result. We think feed costs should be covered using call options on pull backs.
Disclaimer: 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.