Buying Calves

[Cattleman]

Since this is “Commodity marketing” looking for some input, and Cotton, certainly looking for your ideas.
Are these calves a good buy? I make money putting my feed through cattle, and look plus a 20% ROI on the feedlot should be there too. Some of the classes of feeder cattle last week were pricing but not too far out of line I didn’t think. Will have to re-adjust this week.
A bit of a tough ride lately, with changing cattle movements/placements in the US, plus pork and beef markets have been cooling off.
Any ideas on risk management for fed cattle and the grain? There have been big premiums in the LC futures for a while, but the markets have not performed, and we are still near historically weak basis levels in the US. October is another example of the futures coming to the cash, so the hedges have been pretty good that way. But if we are all bulled up, don’t want to miss out. With this latest change, not sure there is real good value in buying options, but not sure I want to sell some options either on the cattle. Not really the time to sell some Calls, I don’t think? A total bull would just stay open, but I am skeptical with latest US numbers that will be with us for this turn of cattle, plus there is the grain.....and the dollar.....

[charliep]

Just curious on your breakevens. Will leave for discussion (also a grains guy so treat thoughts accordingly) but would be looking for profit/ability to lock in margin on both output (finished animals) and input side (feed). Not a risk taker/speculator).

Have been thinking about your question from the grain side. Barley at $4.25/bu is about 9 cents/lb. Likely out to lunch but my memory is about 7 lb of grain to a pound of gain. Cost/lb 63 cents plus all your other costs (yardage, etc.). If US, corn prices closer to $8/bu. or 16 cents per pound of gain. Cost $1.12/pound gain. Distillers grains/other things might bring down but expensive. Still other costs.

Beef demand side in the current economic environment? North America? Off shore?

[charliep]

Don't know where else to put so will insert here. Mike Jubinville indicated that a chunk of western Canadian feed wheat has been sold to a Texas feedlot. No price attached. Checking things out on the corn side, landed Texas corn prices about $7.63/bu or $300/tonne (assuming par dollar). Alberta feed barley and wheat prices mostly in the $180 to $200/tonne range. Don't know the rail freight cost but suspect $100/tonne will move product south and leave some dollars in someones pocket.

Cattleman - Your question was related to calves but I would be watching the feed side. Not sure how all the forage some of lower quality cow feed stuff) will fit into your matrix but feed grain supplies will tight. Potential exists to export Alberta grains at better than current domestic prices. Suspect that will change going into the winter but an opportunity for early movement off the combine.

[charliep]

At $7.63/bu works out to 13.6 cents/lb or close to a buck per pound of gain on an animal.

[cottonpicken]

One dimensional?,lol,i've been called a lot of things here but that just maybe the worst,lol.

http://www.chartsrus.com/chart1.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRUvoi.php?ticker=FUTLH

This is the hog chart going back to 1970,i don't have the cattle going back that far,but i suspect there is enough symmetry between
the 2.

See that little uptick at the start of the chart.

That is where the new trading range was being established.

The old high became the new low and a new high where the ranges limits.

This happened because gold stopped backing the usdx and inflation bl,bla,bla,whole other story i always bla about.

Anywho.....if you where a hog farmer who made sales from a technical perspective,you would have done quite well selling when the
line approached 80 and buying45ish 50 level.

Fast forward to today and a new round of inflation and more bla stories and cattle are a screaming buy,not a sell.

And those volumes and open interest charts-breathtaking.

[cottonpicken]

Kansas wheat.

http://www.chartsrus.com/chart1.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRUvoi.php?ticker=FUTKW

We are on the floor.

Beans?

http://www.chartsrus.com/chart1.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRUvoi.php?ticker=FUTS

40% above floor.

[cottonpicken]

This my creek checking,and it doesn't smell that bad.


http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartstock1CRU.php?ticker=CEF

[checking]

Cotton.

Cattleman referred to you as being one dimensional.

Could this be your definition, and why you like charts?

Pre seventeenth century, a line was defined like this: the line is the first species of quantity, which has only one dimension, namely length, without any width nor depth, and is nothing else than the flow or run of the point which will leave from its imaginary moving some vestige in length, exempt of any width.

[Cattleman]

Ok, I'll admit I took a cheap shot that I thought would get your attention.

Thanks for the info, still doesn't solve my problem, I don't think...

The cattle graph is a little different, but the channels are likely even more pronounced. In the 80's and 90's it was about $58 - $81, then the last decade about $81 - $100. This last year it has jumped to the $101-125. Yeah I know how the old ceiling is the new floor...nothing new. Canadian prices don't work at all, as our price is where we were 10 years ago, but grain prices have since doubled...anyway that can be dealt with.

If I had taken your advice on the last turn, I would have serious wounds. As I mentioned, the basis is near record weak levels, and the futures have consistently come to the cash. Those who would have bought LC on the last turn would have got hammered. We are sitting at LC near $124. Seems to be the high end of the channel, and with the drought in Texas shifting cattle around, I think that premium looks to be in Jeopardy again short term. Long term into later next year, sure I am bullish. How do you incorporate basis, the latest premium erosion, and cattle on feed numbers into your technicals? I think you missed the critical questions.

[cottonpicken]

Ok,i found what your pissed about.

http://www.agri-ville.com/cgi-bin/forums/viewThread.cgi?1211665963

May 24 2008-i said beef was breaking out,specs where coming in,that dayish we where at 96ish,rally went
to 107ish

Then all hell broke lose and the dow dropped from 13,000 to 6500,taking everything else with it including
an across the board commodity slide,beef slid to the80ish level.Oil went from 135 to 40.

Yup,sorry about that knife i put in your back.You really shouldn't take my advice,seeing as how i'm so
shitty at this.

And why are you asking?

You started out by attacking me,then by asking me questions and belittling my responses and then asking
more questions?

Basis is a non issue,it is static and probably contributes to more marketing harm than good.I will admit i
get caught up in things when something goes into contango,but i'm slowly displining my self.

Options,stupidest thing ever invested in,and thats a freebie.

Cattle on feed numbers?-do you think a hedge manager or black box trading platform cares?

They have got a few billion dollars to take care of,and that money needs a home and a return-and thats it
right there the secret to ags success.

[Cattleman]

Cotton, if you have issues with the things I said, you should think about what you have written! That said, I had issues with some of your comments, but I said I did see value in your posts/insights. In terms of basis in the cattle market, it is way more dynamic than the grain markets, and lots of guys miss that in my opinion. Cattle movements month to month are almost like moving from crop year to crop year in some ways.

In terms of funds not caring about cattle on feed, that is my point exactly, and why these basis levels are out of whack. Funds think cattle supplies are shrinking, they send the markets up, so feeders place more cattle on feed in response to the prices, plus the drought in Texas has these basis extra weak. Cattle basis levels and trends are huge IMO. Then when these cattle comes to market the futures come to the cash, as the prices are unrealistic given actual supplies, and people get nailed. Just like they are in the US right now.

Yes I was annoyed, and still don't think it is one simple blanket marketing decision/strategy for everyone at all times!

I am curious about your options statement, I toil with that one too...but not sure I am that convinced?

Anyway, as I have said, I think the macro economic conditions are very interesting and becoming a bigger driver. Looking forward to those discussions.

[charliep]

Options are a tool. Are a cost but have to think about like insurance. Can't take the downside risk but wanting to keep the upside open - you have to pay a premium. Anyone who thinks options are licence to print money should be selling/writing them. There are good risk management strategies around writing options - always a question of what a manager wants to accomplish.

Cattleman - Don't know if you in Alberta but what is you view of CPIP? Cattle Price Insurance Program.

[wilagro]

My opinion: CPIP has got to be one of the dumbest programs going. It assures that the 'packer' IS in control and can offer lower bids on all cattle without too much squawking from the producer. After all..."the producer now has insurance" against drastic loss.

It is all BULL droppings.

There is a cost for this "protection" and IMHO it comes out of the profit pie.

[Cattleman]

Yeah, I think selling options can work in my risk management. Options are pricy to get into a valuable spot... I look at options sometimes with corn, but more on spec it seems Nice not to have margin calls.
CPIP makes sense. Fed cattle is hit and miss, and works sometimes. The others are a little less appealing, mainly since we have had such a tightening of the basis, the program does not give as much protection as it should in my opinion.

[cottonpicken]

80% of options expire worthless.

If your looking to hedge and risk manage and play it
safe my feeling is you put that money into
something like a solid dividend paying oil company.

Fuel is a cost we all have and over the course of
time at some point your dividends will be a good
chunk of your fuel bill,and you always end up with
something of value.

If your like me and love the risk game,there are
different scenarios of what you could do with that
money but i'm not going to get into that.

NIA DYODD