Summer Opportunity for Cattle Feeding Investments

June 15, 2010 08:00 AM

By Kim Watson Potts

Over the last week, the cattle futures market has corrected itself with a slight downturn. That correction is temporary say market analysts, and it shouldn't dissuade cattle feeding investments.

"We do think this summer will be a great time to be involved with cattle feeding," says Rich Nelson with Allendale Inc "Feeder prices have corrected off their recent highs while corn prices have seen significant price declines."

In addition, he says the U.S. economy will slowly continue its recovery over the next few months, and indications are that beef demand may show improvements by the end of the year. The beef industry is already seen improvements in exports, and beef supplies and other protein supplies remain tight.

"Overall the cattle market looks like it has bullish potential, but a feeder has to be aware of external factors that may hold our rally in check. We continue to see high unemployment rates, potential tax increases, little economic growth in light of low interest rates, and a burgeoning national debt as factors that may trump the bullishness of the cattle market," says Justin Gleghorn with Brock Thompson Trading in Amarillo, Texas. "In short, potential exists, but the risks have to be defined and protected against."

If you are considering putting money into the feeder market, Nelson recommends:

  1. "Keep purchases near the lighter end of available feeder supplies. Lighter feeders will finish out later in the year. In the case of beef demand and its impact on live cattle prices, time is your friend."  
  2. "All feed costs should be covered with calls. Currently, corn in the field appears set for record yields and prices are low. Any change in the weather in the coming weeks could significantly add to feed costs."
  3. "Normally, we do not recommend cattle feeding without hedges on fat cattle. In this case, after the normal summer decline in cash cattle finishes up, we are strong bulls on cattle prices into 2011."

While tight feeder supplies have been supportive of that market and buyers continue to be aggressive to fill pen space, hedges against rising feeder prices should be addressed using call options, says Gleghorn..

"We have already seen feeder cattle break seasonal price trends this year, where they began rallying in mid-December and never weakened until last month," he says. "As such, we feel that we may see feeder cattle strengthen towards the end of the summer and remain strong through the fall."


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