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Market Plus: Oct 31, 2003

posted on October 31, 2003


Market Plus: Oct 31, 2003

Pearson: Thanks for checking in on our Market to Market Web page and our Market Plus Web site, glad you're here. Be sure to tell your friends or neighbors. My name is Mark Pearson, my guest this week, Alan Brugler from Omaha. He's one of our regular market analysts now. And Alan, we were talking about beans a lot and of course you really can't talk about beans without talking about the product, meal and you can also talk about this corn market and what's happening. This corn meal spread, how is this driving the market?

Brugler: Well, basically the meal corn spread is the highest that it has been since 1997. What that means is that on a feed basis, on a per ton basis that the soybean meal is more expensive now than it's been in a number of years relative to corn. So, what that tells a producer is to the degree that he can't do so, he needs to switch, cut back on his meal feeding, put a little more corn in the ration. In some cases that means he's got to add some lysine or some other additives to compensate for the differences in the two inputs. But the market is clearly telling a US producer to cut back on the meal feeding and try and substitute more corn or DDG's, okay, which is convenient because we've got record ethanol production, we've got a lot more DDG's available and that can be substituted in the ration as well. But we are at multi-year highs in that ratio and we would expect to see some substitution taking place.

Pearson: Okay, so we've got that going on. What about the impact on corn prices? Because you're right, we start picking up more corn feeding and away from the meal, that's going to be good for corn. Is that part of what this rally has been about?

Brugler: Yeah, I think the domestic use is a tough one to measure, it's kind of a residual, USDA doesn't actually survey for feed use of corn, it's a derived number. And they've been having some trouble measuring it because of the ethanol growth, you know, the bushels that are gone but they're not really gone because a percentage of them ends up getting fed back out the back of the plant. But clearly with that spread there's an incentive to feed a little more corn and a little less of other byproducts or other coproducts.

Pearson: Excellent. I want to talk about this cattle market and what's been happening on that front. We talked about the situation, possible reopening of Canada in January. As you pointed out, really kind of a non-event, something we know is going to happen at some point, but you look at this cattle market right now and you look at what these feeders are doing, you look at what the boards are, there's not much in the way of hedge protection. But you're saying, hey guys, maybe look at that potentially in some kind of a strategy to get some kind of insurance on these high price calves.

Brugler: Yeah, I think your number one goal here is you've been rewarded with excellent sales price, you don't want to blow that all on the next swing of the cycle by overpaying for feeders and then end up selling fairly cheap cattle next spring or next summer. So, what I'm advocating is putting some kind of a price floor under those finish cattle, even if it's not really at a break even or a positive price spread at the time. The reason being that you don't want, you want to minimize your losses and then if the market does subsequently rally you can roll, if you're doing put options, you can roll the puts up to where you're now in a profitable position. One thing that worked for us last spring was we had a big discount in the June contract to what the February and April had been doing. We were able to sell, in that case, June $66 dollar puts were already down below what would normally be a twelve month average move in cattle which is about sixteen dollars a hundred. In other words, the market had already discounted a full twelve months decline from the February high. And we thought that we could pick up a couple dollars a hundred by selling those out of the money puts. We're looking at a similar strategy here where we have big discounts in the deferred cattle futures. So, the potential for those futures contracts themselves to go down is fairly small. But you could potentially enhance that by selling some strikes further down that aren't likely to get hit.

Pearson: Good points, good strategies, good ideas as usual from Alan Brugler, one of our regular market analysts. For all of us here on Market to Market, thanks for joining us here at our Market Plus Web site. Be sure to tell your friends. Have a great week.


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