Evening Report (VIP) -- Advice -- January 23, 2014

January 23, 2014 08:48 AM

Fed cattle producers: Protect downside risk on remaining 1st-qtr. and 50% of 2nd-qtr. marketings... Given the record runup in the cattle market, fed cattle producers must protect themselves against a sharp corrective pullback. But with futures trading well below the cash market, a hedge in short futures is undesirable. Instead, buy April $136.00 put options to cover remaining 1st-qtr. and 50% of 2nd-qtr. marketings. To offset the cost, sell the same number of April $144.00 call options. Our fills were $1.325 on the April $136.00 puts and $1.525 on the April $144.00 calls.

This covers your downside risk if the market drops sharply and doesn't cost you anything out of pocket. A worst-case scenario would be the market continues to rally and you are exercised into a short futures position at the equivalent of $145.525 in April live cattle futures ($144.00 strike price plus the $1.525 you were paid to write the calls).


Key for COF Report will be how tight supplies are pegged... Throughout 2013, USDA's Cattle on Feed Report pegged On Feed supplies below year-ago -- the same is expected this year. Therefore, key to the market is just "how tight" those supplies are estimated month after month. According to pre-report expectations, traders look for this Friday's report to show On Feed at 94.0%, Placements at 98.1% and Marketings at 102.2% of year-ago levels.

Report expectations

Avg. Trade Guess


% of year-ago levels

On Feed










With cash cattle prices at record levels, producers have been encouraged to keep lots very current, which is why traders look for Marketings to come in above year-ago levels. Meanwhile, the Placements category is expected to come in below year-ago levels after producers aggressively placed cattle last fall, which further tightened calf supplies.

The Placements category is the wildcard as the pre-report range of expectations remains wide (91.4%-102.1%). If the category comes in above year-ago levels, it would suggest imports from Mexico and Canada have picked up.


Drought Monitor reflects slight expansion of dryness... According to the National Drought Monitor, drought covers 53.37% of the contiguous U.S., which is up slightly from 52.57% last week. Slight deterioration was noted across the Midwest, Plains and South from last week, while the drought across the West was unchanged.

The monitor notes:

  • Abnormally dry conditions expanded into western Iowa and adjacent areas where 60-day precipitation totals were under half of normal.
  • A few areas in southeastern Texas and the Texas Panhandle worsened to moderate drought levels, which were on the cusp of classifications last week.
  • Drought was moderately downgraded to in south-central Louisiana where six-month precipitation totals were at least 9 inches below normal. In a larger surrounding area of central and southern Louisiana and adjacent Mississippi, drought expanded into areas at least 4 inches below normal for the last 60 days and recording under 4 inches of precipitation since late December 2013. Click here for related maps.


Ethanol production recovers... The Energy Information Administration reports for the week ending Jan. 17, ethanol production was up 37,000 barrels per day (bpd) from the previous week to 905,000 bpd. Ethanol stocks climbed by 940,000 barrels to 17.02 million barrels due to soft gasoline demand.


Institutional farmland index posts 9.3% gain in fourth quarter of 2013... LandOwner Editor Mike Walsten reports the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index rose by 9.3% in the fourth quarter of 2013 for an annual increase of 21%. The fourth quarter typically has the highest income and total return, says NCREIF. The average total return over the history of the index is 2.89% and the fourth quarter average is 6.08%. Excluding 2012, this quarter’s total return was the highest quarterly return since fourth quarter 2006. Click here for more.


Obama budget proposals will again be late... As expected, President Barack Obama today announced he will again miss the deadline for submitting his Fiscal Year 2015 tax and spending plan. Statute requires the president's budget be submitted to Congress by the first Monday in February. The president says the plan will be released March 4 -- a full month late. A budget office spokesman says work on the proposal was slowed by both the two-year budget deal Congress passed in December and the recently cleared omnibus spending bill. Last year, President Obama was more than two months late in delivering his budget.


Sources signal effort underway to revisit apparent dairy compromise... A reopening of what had been considered an agreement on dairy policy as part of the new farm bill is being pushed, but is opposed by key farm bill leaders and House GOP leadership, according to sources. House Ag Committee Ranking Democrat Collin Peterson (Minn.), along with the National Milk Producers Federation, are said to be seeking more onerous language in the dairy provisions to avoid overproduction of milk since the concept of voluntary supply management was dropped from the package.

Sources signal Senate Ag Committee Chairwoman Debbie Stabenow (D-Mich.) has given the renewed push some daylight, but House Ag Committee and Conference Chairman Frank Lucas (R-Okla.) and others are upset the compromise is being revisited with the farm bill finish line in sight.

Stabenow is also reportedly digging in on other lingering issues dealing with crop subsidy cap/actively engaged issues. If so, there may be some hard votes ahead for conferees. Stabenow wants to avoid any votes on specific issues by the 41 conference members, but some sources indicate Lucas and/or House Republican leaders may (should) call conferees back to vote on remaining issues. Get more details and perspective.

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