Cattle Market & Farm Reports, Editorials
Dec 2, 2008
COMMENTS Capitalism will prevail
Saying it was a bizarre week in the futures markets may be a mild thing to say and it is clear as a bell that any market fundamentals have been completely ignored. Coming into Thanksgiving, it’s normal for beef packers to buy a few less cattle for the short processing week. The boxed beef cutout has maintained itself, though, most of the week, hanging in at $158 or so on decent trade volume. But last Wednesday, the live cattle futures had a near limit down day with December closing at $84.20 with good live cash trade at $88. I suppose the good news is that cash is trading at a premium to futures, nonetheless though, earlier this summer, fed cattle trade was expected to be at $105 this month.

However, hedged feeders should be feeling fairly comfortable compared to non-hedged feeders. With the government seemingly ready to hand out $25 billion in “low interest” loans to the auto industry, it is clear they don’t seem to give a hoot about agriculture or feeding people. It appears the only interest the government has in agriculture is pursuing the ethanol mandates of the 2007 Energy Independence and Security Act. Last week, the Environmental Protection Agency raised the ethanol blending requirements for gasoline from 7.8 percent to 10.2 percent, an increase of 24 percent. The blending requirement is based on the 2009 mandate to produce 11.1 billion gallons of ethanol, and that is divided by expected gasoline usage. Not rocket science, but it does create a bit more demand for ethanol.

Now that the hedge fund speculators have abandoned oil futures, we have an oil market that is a bit more realistic. We can breathe a small sigh of relief, even though the government is going to be headstrong on this renewable fuel agenda and continue to shove it down our throats.

USDA announced the 2008 corn crop was going to be about 12.2 billion bushels, down about a million bushels from 2007. With ethanol production scheduled to increase, even though many ethanol companies have bit the dust, it seems unlikely we will have enough corn to go around based on typical corn usage.

The thing I’m having a hard time with is the next corn crop. I’m sure that production costs will come down somewhat, but I can’t imagine that many producers will be to eager to plant corn at $4 a bushel when many can plant soybeans at a lower production cost. I would expect to see the futures markets start bidding for corn ground sometime soon. The meat industry has been the forgotten child in this mess. The processing sector has been taking a major equity hit over the past year. Cattle feeders have had a harder time, for a more extended period of time. I would estimate that there has been $5 billion lost in cattle feeding over the past three or four years. I would think they are ready for a bailout too, after all, they were the victims of an unfunded mandate.

The meat groups are trying to do their part. The American Meat Institute, National Chicken Council and National Cattlemen’s Beef Association held an event in Washington, D.C., last week to attempt to persuade the incoming Obama administration to repeal what they deem to be harmful ethanol subsidies, which they claim are costing more than $5 billion annually.

With the green overtones of the Obama administration, I would expect their plea fell on deaf ears. The irony is that all meat producers are asking is to make the ethanol producers compete in the same market as they do. Ethanol blending subsidies and low interest loans to ethanol producers place all other corn users at a disadvantage.

If the ethanol industry is unable to stand on its own two feet, it will cease to exist. We’re currently seeing examples of why the federal government should stay out of the free market. We know that we’re never going to have a level playing field in international markets, however, creating a level playing field in our domestic markets is the right thing to do. That is all the meat industry is asking for. — PETE CROW