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Why Is Live Cattle Making New Lows?

Feeder Cattle broke down first and then Friday, March 15, 2013, Live Cattle followed. Lean Hogs did not break down to a new low so far, and between the two, I am more bullish hogs than I am cattle right now. What happened here?

The number of cattle on feed are lower than they have been in over 50 years. Shouldn't this translate in historically high prices?! Well, even though there are few numbers of cattle on feed when compared to historical averages, the live cattle futures contract price has not exploded higher for many reasons. Even though there are fewer cattle, the cattle we are slaughtering are coming in at much higher weights. Farmers are holding out for higher prices and the cattle are putting on additional weight, which partially makes up for the lower numbers. Also, consumers are eating more chicken and pork and fish. The amount of beef being consumed per capita in the U.S. is trending lower. This is partially due to health concerns about eating red meat, and partially due to the cheaper prices of the alternatives. One thing that really hurts live cattle is the fact that retailers have not featured beef. Knowing there are not that many cattle out there, they have made a strategic decision to help ration beef supplies by keeping the retail prices extremely high then compared to the wholesale prices of beef that the retailers are paying. The higher prices have indeed helped ration and reduce demand. Retail beef is not competitive with other meats on a price basis. If the retailers would cut their margins a little, dropping the price, then more beef would be consumed and prices would pop up due to the higher demand. However, retailers know there are limited beef supplies and feel no incentive to feature beef and help out the farmer. They want to capture the most money they can and keep prices high. The high prices have worked quite well in rationing out the tight supplies and demand has adjusted to the low supply levels without raising prices. Also exports to Japan and elsewhere are not booming either.

One other problem with processed food products is that the price of the farm product, has little impact on the finished product price. Don't they say that wheat costing 3 cents, will go into a loaf of bread that sells for $2.50. You can double the price of wheat with virtually no impact on the retail price. The same is slowly becoming true in the retail beef trade. Retailers will complain that salaries, taxes, transportation costs, etc. make up most of the price of a steak, and those costs are all going up. The retailer is having their margins squeezed to the point they just can't feature beef and lower prices to push beef out the door.

Another problem is that packers have also been reluctant to bid up the price they pay to farmers so again, burdensome supplies do not get cleaned up. The packers are either operating in the red or with very tight profit margins. No one has any incentive to help out the lowly farmer and to raise the wholesale prices of beef.

Between the two meats, I am presently more bullish on lean hogs than lean cattle and would rather sell puts on October and December lean hogs, picking puts that are very far out of the money. I would look at the options that are selling with about 50 to 75 cents of premium. I have found that these low priced options are far enough out of the money it requires an extreme down movement to get them in the money. I chose October and December to sell puts because the prices of these contracts are quite low and the puts have lots of time value and are extremely far out of the money.