also be taken into consideration.Farmers will use wheat as a substitute feed when its price dropsenough to make it economical.Exports are another major demand element. Although theUnited States only exports about 20 to 30 percent of its crop, this represents about 75 percent of the world’s feed grain trade. Most countries produce their own feed, primarily in the form of silage. Only ahandful of countries grow enough corn to be a real force in the export business. Of these countries, none is considered a steady andreliable supplier. They export only when they have a particularlyabundant crop.
Price ForecastingIt’s almost impossible to analyze corn prices using fundamentalanalysis! Keeping track of the the impact of the worldwide weather
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patterns on yields alone is a Herculean task. Further, you must accurately forecast cattle and hog numbers as well as usage for alcohol, seed, and food. There have been several attempts to developeconometric models to manage all the variables, but none hasproved exceedingly successful. Technical analysis has been moredependable. For example, seasonal patterns are reliable. Price highsare usually made in late July or early August; lows come in November or April. Several reasonably reliable long- and short-termcycles have been isolated.Chart analysis also works pretty well. Head-and-shoulder formations can be traded with an acceptable amount of confidence.The price activity of corn also responds to other predictive formations, such as flags and triangles. Once a solid trend is established,you can work the trend line for all it is worth. Corn is a very popular market and almost always has plenty of liquidity.OVERVIEW OF THE WHEAT MARKET
Like sugar, wheat is a universal crop, grown all over the world andharvested year-round. Carvings found in Egypt indicate wheat hasbeen cultivated since at least 1000 b.c.Wheat belongs to the grass family. Its kernels grow in compactheads on the end of hollow stalks, making it easy to harvest. China,India, the United States, Russia, the European Union, Canada, Argentina, and Australia are among the top wheat-producing nations.China and Russia, although major producers, usually consumewhat they produce and are often net importers.About 50 percent of the U.S. production is exported. Canada isalso a major exporter. From time to time, depending on crop conditions, other countries can make a major impact on world pricing.Subsidized exports by the 15-nation European Union, particularlyfrom wheat producer France, cut into the amount of wheat the U.S.can sell in such areas as North Africa.Since most countries consume the wheat they grow, the production of the exporters must be watched closely. Also, the wheatprice analyst needs to be aware of the amount of supply availableworldwide. Since wheat is primarily a food, prices are elastic. Theprice is very responsive to changes in the supply-demand equation.Wheat is unique, as far as the price analyst is concerned, in thatthe type of wheat available is an important consideration. Wheat
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produced in the United States, consistently the world’s largest exporter, can be classified as common and durum wheat. Common isfurther classified by color (red or white) and by hardness (hard orsoft). It can also be classified by the time of planting (spring versuswinter). The U.S. crop is about evenly divided between spring andwinter wheat.
Supply SideWinter wheat is planted in the fall, lies dormant during the winter(ideally with a snow cover that prevents the erosion of soil and seedand that will provide moisture for germination in the spring), andis harvested between late May and June. Spring wheat is planted asearly as possible and harvested in late summer.Hard red wheat, the majority of the U.S. production, is valuedworldwide because of its high protein content. The hard reds alsocontain a large quantity of strong, elastic gluten, which is ideal forbreadmaking. These wheats are produced in the dry climates ofKansas, Nebraska, Oklahoma, and northern Texas.Soft red wheat is produced in areas with high rainfall, such asthe Great Lakes, Atlantic Coast, and eastern Texas. Its primary useis for making pastry, crackers, biscuits, cakes, and similar products.It has a lower protein content than hard red.The last major type of wheat produced in the United States isdurum. Grown in North Dakota, South Dakota, and Minnesota, durum wheat is used for making semolina, which is particularly suited for pasta.
Demand SideWorldwide demand for wheat is caused by the need to feed billionsof people every day. Most countries consume all they produce. Inthe United States, demand also comes in the form of export, whichcan be through either commercial firms or government programs.Food is a very politically sensitive subject. A well-fed countryis usually a politically stable country. The opposite is also true. Foryears, the U.S. government exported large amounts of wheat inhopes of stabilizing client countries. Therefore, politics can play animportant role in demand.
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Wheat can be used as a feed substitute for corn in livestock enterprises. However, the quantity of wheat used for this purpose isvery insignificant. The impact, if any, is on the price of corn and isusually short term.
Price DeterminantsWorldwide weather is the dominant factor affecting wheat prices.Refer to the supply-demand equation given in the section on corn.Particular attention must be paid to China and other large, importing countries.Government policy is the second most dominant determinantof wheat prices. If a shortage occurs in a controlled society, to whatextent will the government go out on the open market to replace theshortfall? Or will the government tell its people to tighten theirbelts? How will the foreign policy of a major exporter, like the United States, have an impact on pricing?Other important determinants are exchange rates (a strongdollar hurts U.S. exports), level of carryover stock (the higher thelevel, the lower prices will be), availability of storage and transportation (these have a short-term impact on prices), changes inproduction and consumption patterns (these produce gradualchanges), and seasonality.Prices tend to decline in harvest months as supplies becomeplentiful and increase toward the end of the year.
Technical AnalysisWheat is a very popular futures contract. It usually has plenty of liquidity and responds well to basic technical analysis.
OVERVIEW OF THE OAT MARKET
Oats are cereal grasses that grow well in cool, temperate climatesand are produced all over the world. Farmers have always foundthem useful because they actually do best in poorer soils. Even inareas with an abundance of high-quality ground, you’ll find oatsgrown on the lesser fields.
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Supply SideThe Commonwealth of Independent States, made up of countries ofthe former Soviet Union, is the world’s largest producer, followedby the United States, Germany, Canada, and Poland. Oats have beendisplaced during the last decade or so by higher-value crops. But theUSDA, in a recent outlook, projects that the long-term downwardtrend in U.S. oat acreage will bottom out in the early 2000s. U.S. production was estimated at 167 million bushels for 1998. The UnitedStates has been importing food-quality oats for many years, and isexpected to continue to do so. The USDA projects production willrange from 155 to 165 million bushels during the next 8 to 10 years,with total use remaining at about 270 million bushels. This willmean around 100 million bushels will be imported.Oats are a lot like wheat in that the producing countries consume just about all they produce. Less than 5 percent of the world’sproduction finds its way into export channels.In the United States, the major producing states are SouthDakota, North Dakota, and Minnesota. The United States primarily grows white oats, although some red and gray are produced. Oatsare planted in early April or late May and are harvested betweenmid-July and late August.
Demand SideThe single largest use of oats (nearly 95 percent) is as livestock feed.Worldwide, livestock consume most oats on the farms on whichthey are grown. They are a particularly excellent feed for horses,breeding animals, young stock, and poultry because oats have thehighest amount of protein among the cereal grains. They are alsohigh in carbohydrates, which provide energy.The decline in oat acres and production in recent years hasbeen the result of a decline in the number of horses and mules employed as work animals.A small amount (less than 5 percent) of oats is processed intofood for humans. These are made into oatmeal and other food products. Recently, results of clinical tests indicate oat bran can be usedin human diets to reduce the amount of cholesterol in the blood.This may increase food consumption. It, however, won’t be signifi-
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cant to the overall world production. Also, a small portion of eachyear’s crop is held back for seed for the following year.
SeasonalityLike the prices of most crops, oat prices tend to weaken as we moveinto harvest when supplies are plentiful. This puts the lows in theJuly–August time frame. After harvest, prices usually increase, withthe high being hit most often in January.
Price DeterminantsOats, as previously stated, are primarily used as feed for livestock.Therefore, the number and mix of livestock and poultry on feed isthe primary price determinant. Analysts must pay close attention toall the USDA’s livestock and crop reports because oats compete withother grains—corn, sorghum, and even wheat—as feed.A partial list of reports you’ll want to monitor if you trade oatsinclude Planting Intentions, Prospective Planting Report, MonthlyCrop Production Reports, Monthly Eggs, Chickens & Turkeys Report, Quarterly Hog & Pigs Report, Livestock and Meat Situation,Cattle on Feed, Weekly Roundup of World Production & Trade, U.S.Export Sales, Stocks in All Positions, Grain Market News, Feed Market News, Wheat Situation Report, and others. Additionally, you’llwant to review various state agricultural reports, particularly thoseof North and South Dakota.Another important fact to keep in mind when you do youranalysis and begin to compare oats with other feeds is that oats arelighter than other feeds. A bushel of oats weighs only slightly morethan half of what a bushel of corn weighs. This equates to its feedvalue, which is slightly more than half that of corn. Therefore, a cattle feeder would have to buy more oats than corn to feed the samenumber of cattle or poultry. It’s not a one-to-one comparison. In general, if you compare oats with corn by weight, oats sell for about 85to 90 percent of the price of corn.As with any crop, weather is an important price determinant.However, oats are a hearty crop. They are less vulnerable to badweather than most. This is documented by the fact that so much ofit is grown in North and South Dakota, states that are not known fortheir pleasant climates.
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Carryover of stocks from one year to the next is another critical factor when forecasting price levels. Refer to the supply-demandequation in the corn overview. The higher the amount of carryover,the lower prices will usually be. Also, keep in mind that you mustcompare the oat carryover figures with those of other feed crops,particularly corn. If one is high and the other low, feed users willswitch to the more plentiful, usually less expensive, feed.Uncle Sam has a heavy hand in the process of determining future price levels. You must know if there is a government programaffecting oats, how it works, and what is its expected impact.
Trader NotesThe speculative use of the oats futures contracts is very similar tothat of corn, but there are some important differences. Because of theenormous size of the corn crop and the tremendous amount ofhedging that goes on, moves are usually slow and ponderous. It often takes “forever” to get a major trend change in corn under way.This market can absorb large jolts, such as foreign countries unexpectedly entering the market to buy several million metric tons.Oat futures contracts are much thinner than those of wheat andcorn, and therefore much more responsive to trading activity. Manytraders use this characteristic to advantage by using oats as a leading indicator of the grain complex’s direction.If oats make a major change in trend, the traders then positionthemselves to take advantage of this in the corn and wheat markets.If you trade oats, just remember that a thin market is often veryvolatile and dangerous. On the other hand, the margin money required to buy a futures contract in oats is usually the lowest of allthe commodities.
MEATSOVERVIEW OF THE LIVE HOGAND PORK BELLY MARKETS
On a worldwide base, the United States ranks third in pork production, behind China and Russia. However, there is a negligible
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import-export business and so your knowledge should primarilycover the U.S. markets.Iowa has the largest production in the United States. Nine other states (Georgia, Illinois, Indiana, Kansas, Minnesota, Missouri,Nebraska, North Carolina, and Ohio) are major producers. Together these 10 states account for approximately 75 percent of total U.S.production.Pork producers have a special vocabulary of their own that youwill need to understand. Farrowing is the act of giving birth. Gilts arefemale swine that have not given birth to a litter. Boars are male hogsused for breeding. Stags are boars castrated after sexual maturity.Barrows are male hogs castrated before maturity.The reason for castration is simple. It increases the rate ofweight gain and reduces aggressive behavior (fighting). The production cycle for hogs is relatively short. The gestation period isapproximately 4 months. Sows are bred twice a year. Litters rangefrom 5 to 15, with an average of approximately 9, of which 7 reachmaturity. Gilts reach sexual maturity and slaughter weight at 6months. At this point, they can be held back for breeding or sentto the packinghouse. Barrows reach slaughter weight (220 pounds)at 6 months. It takes about 1¹⁄₂ years from the time a pig is born tothe time a pork chop from its offspring reaches the dining roomtable.
Supply SideHog farmers often integrate their production. It is common for producers to grow much of their own feed (corn or soybeans), farrowtheir own feeder pigs, and finish them out to slaughter weight. It isnot unusual for a pig to spend its entire existence until slaughter inthe same building or adjacent buildings—moving only from thenursery to the feeding floor. These pig farms are known as “farrowto-finish” operations.In the past when hogs farrowed in pastures and were fed inopen lots, all females were bred in the spring and fall. This gave aseasonality to production. Now, with more sophisticated facilities,production has leveled off somewhat.A 220-pound market hog yields an average 153 pounds ofpork, trimmings, and lard. Fresh hams account for about 18.5 per-
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cent; pork bellies (bacon) 17.5 percent; loins 15 percent; trimmings18 percent; picnics 8.5 percent; and others 22.5 percent. The six commercial cuts are hams, loins, picnics, Boston butts, bellies, andspareribs. These represent 40 percent of the live weight and 90 percent of the value of a hog.
Demand SidePork has always been an important part of the American diet. During the last 20 years, pork has faced some stiff competition frombeef, chicken, and fish. It has been fighting back for a market sharein the media, in recent years as producers have bred a leaner product and promoted it as “the other white meat.”Unlike beef, of which most is consumed fresh, pork is mostlyprocessed or stored—smoked, canned, or frozen. Pork bellies, forexample, can be stored (frozen) up to 1 year before processing. Theease of storage of pork products means that the forecasters of futures prices must take supplies, as well as production, into consideration.
What Are Pork Bellies?The pork belly is the layer of meat and fat from the underside of thehog. Each hog has two bellies, one on each side, which extend fromthe front to the rear legs. They weigh between 10 and 20 pounds.Most bellies weigh 14 to 16 pounds. Almost all bellies are cured,smoked, and sliced into bacon. A well-developed cash market existsin bellies, which impacts the futures markets.
Fundamental AnalysisFundamental analysts usually take the pipeline approach. What isthe farrowings number? How many feeder pigs are available? Howmany gilts will be held back for breeding? How many market hogsare in the system and at what weights? What are storage levels? Youmust consult USDA quarterly reports (Hogs and Pigs Report) released in March, June, September, and December for numbers. Theycover the top 10 producing states.
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Hog CyclesThe hog cycle is considered to be a 4-year cycle. It may range fromas low as 3 years to as high as 6. During the last 50 years, there havebeen 12 cycles averaging 4.1 years. The expansion phases lasted 2.4years on average, and the contraction phase 1.7 years.
SeasonalityAs mentioned earlier, the seasonality of the production cycle has become somewhat less meaningful over the years as production techniques have changed. Still, hog prices tend to have a definite seasonal pattern. Hog prices tend to bottom in late spring and thefourth quarter. Most highs are made in August. With pork bellies,the inventory level on hand tends to impact any seasonal pattern.There is also the BLT factor—demand in late summer for bacon, lettuce, and tomato sandwiches.
Price DeterminantsNaturally, the supply-demand equation is the most important pricedeterminant. You must be on top of the size of the pig crop, hogslaughter, slaughter weights, direction of two-way gilts, etc. Otherdeterminants are:1. Hog-corn ratio. This is the price of corn (major feed component) compared with the price of hogs. If the ratio is low,feeding is profitable. If high, it isn’t. With the increased investment in buildings and the cost of feed supplements,this ratio has become less reliable in recent years2. Weather. Unusually hot or cold weather can impact weightgain. This is somewhat mitigated by the confined feedingsystems currently being used, but not entirely.3. As mentioned in past sections of this series, such things asfashion, health considerations, and promotions can impactprices by influencing demand.
Trading and Technical AnalysisPork belly contracts are a favorite of day traders and aggressive position traders because of the wide price ranges in which the con-
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tracts trade. But the volatility factor should be taken as a warning toneophyte traders.Both the bellies and the hogs lend themselves well to spreadtrading strategies. Nearby contracts usually gain enough on the distant in bull markets—and lose enough in bear markets—to makethe spreads attractive, especially when you take the lower marginsand somewhat more manageable risk (compared with a straight futures position) into consideration.Always trade these markets with stops. They respond violently to unexpected news, weather, or reports.OVERVIEW OF LIVE AND FEEDER CATTLE MARKETS
The production of beef requires the breeding, raising, and fatteningof cattle. As with pork, this industry has a unique vocabulary thatyou need to understand.Cow. A mature female that has had a calfHeifer. A female under 3 years old that has not yet produced acalfBull calf. A male calf, not yet castratedSteer. A castrated maleBull. An uncastrated male, capable of reproductionYearling. A calf that has been fed on pasture for approximately 1 yearAnother unique aspect of beef production is its cycle. There are14 to 18 months between when a heifer calf is born and when thatcalf is bred. The gestation period of a calf is 9 months.There are 17 to 19 months between when a bull calf is born andwhen it can be slaughtered as a fed steer. It takes over 2-1/2 yearsfrom the time a cow is bred until a steak from its offspring is in thebutcher’s case. A lot can happen from the beginning of the production cycle to the end. The cattle go through several stages and hands.There are three distinct sectors of the cattle industry:The first is the ranch, called the cow-calf operation. Calves andfeeder cattle are produced here.The second sector is the feedlot. The feeder cattle are fed outin preparation for slaughter. When ready for market, thefeeder cattle are called fat cattle.
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The packer is the third segment of the industry. It convertsthe live cattle to beef and by-products.
Supply SideThe cow-calf operation produces calves. It is the driving force thatmoves the cattle business. A typical breeding herd in the UnitedStates consists of 75 cows, with 1 bull per 20 cows. Depending onthe climate and rainfall of the ranch, it may take from 5 to 200 acresto support 1 cow-calf unit.The herd is usually bred in the summer, with the calves bornin the spring (as noted earlier, a 9-month gestation period). Thecalves are weaned after 6 to 8 months, when they weigh about 300to 500 pounds.The weaned calves are two-way cattle. Either they can go directly to the feedlot for fattening, or they can be put on grass foranother 6 to 10 months, until they weigh 650 to 800 pounds. The decision is based on cattle prices, production costs, and economicconditions. Additionally, the cow-calf operation must hold back up to20 percent of its heifers as replacements for cows that become barren.The feedlot sector takes the calves from the cow-calf operatorand fattens them for slaughter. Usually steers are fed until theyweigh 1,000 to 1,200 pounds and heifers until they weigh 850 to1,000 pounds.There are basically two types of feedlots: commercial andfarmer. The most common distinction between them is that the commercials have a larger capacity. They can feed 1,000 or more headsat a time. Anything less is classified as a farmer feedlot. The commercial feedlots tend to be more efficient with better rates of gainper head, higher gains per day, and shorter feeding time.The last sector is composed of the packers. They purchase thefed cattle, slaughter them, and sell the beef and just about everything else (hide, trimmed fat, bones, blood, and glands). The carcass,which is approximately 62 percent of the live weight, will yieldabout 50 percent steaks and roasts. The rest will be hamburger, except for about 5 percent that becomes stewing beef, on an average.
Demand SideAfter the packer, the beef enters the retail food chain. Beef is almostexclusively produced for human consumption, with a small amount
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used in dog food. Beef has a lot of serious competition, such as pork,chicken, fish, and other types of meat and poultry. Several vegetableproducts, soybean fillets, and meat substitutes attempt to competedirectly or indirectly.
Fundamental AnalysisBecause of the lengthy production cycle and the limited ability tostore beef, one popular approach to analyzing price is the pipelinemethod. Users of this analytical tool estimate the supplies at handin each of the various sectors of the industry. They attempt to anticipate the decisions of the managers of each sector. Will cow-calfoperators hold back more than 20 percent of their heifers this yearto increase the size of their herd? Which way will two-way cattlego?The basic source of information on the status of the pipelinecomes from quarterly reports issued by the USDA. They are calledthe Cattle on Feed Reports and cover the top 13 cattle-feeding states,or about 85 to 90 percent of all cattle on feed. Since the typical lengthof feeding is approximately two quarters, you can anticipate slaughter numbers. The USDA also publishes data on fed cattle, slaughter,and beef production which can be compared with earlier forecasts.
The Cattle CycleThe size of the cattle herd has a distinct, long-term cycle. There havebeen 8 cattle cycles identified since 1896, averaging 12 years inlength. They have ranged from 9 to 16 years in length. On an average, the national herd expands for 7 years and contracts for 5. Theprimary reasons for the cycle is the length of the production cycleand heavy investment (land, equipment, and cattle) required to enter and stay in the business.
SeasonalityThere are no set planting or harvesting time periods for cattle, aswith other agricultural products, but there is still is a seasonal cycle.Most calves are born within 45 days of April 1 and weaned within45 days of October 1. The 350- to 500-pound calves are usually kept
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on grass until they gain 250 to 350 pounds. Then they are sent to thefeedlot to gain 2 pounds a day for the next 210 days. At that point,the steer is 26 months old, weighs 1,150 pounds, and is ready forslaughter.
Price DeterminantsSeveral factors impact the price of beef besides the supply-demandequation already discussed. Feed costs account for approximately30 percent of total production costs. Low corn prices stimulate production and enable more weight to be put on fat cattle. This increases beef supplies and lowers prices.Since cattle production is capital-intensive, interest rates canstimulate or stifle production. Weather can also impact production.Particularly hot or cold weather reduces weight gain. Taste, fashion,and sales promotion can influence consumers. Is eating beef the“healthy thing” to do? Will TV spots increase usage or switch consumers to the “other white meat”?
Trading and Technical AnalysisThe length of time required to make major changes in the cattle cycles causes the market to develop long-term trends that are ideallysuited for technical analysis. This can also result in the market trading for long periods of time within narrow ranges, making it difficult to trade it profitably, except on a very short-term basis.FOOD AND FIBEROVERVIEW OF THE SUGAR MARKET
Two types of sugar exist: cane and beet. Historically, cane accountsfor about 60 percent of the world’s production. Cane sugar is aperennial crop with an 18-month growing season. After harvesting,the stubble left in the fields produces another crop. With each successive crop, the yield diminishes. Eventually, it has to be replanted.Cane sugar is grown in many countries around the world andis one of the few crops harvested year-round. The major producersare Brazil, the European Union (EU), India, the United States, and
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China. They account for almost half of the world’s production in agiven year. Brazil has increased production by 90 percent since1993–1994 and now accounts for about 15 percent of the world’ssugar output. It has about 25 percent of world exports.Beet sugar accounts for the other 40 percent of total production.The EU produces more than 75 percent of beet sugar. Sugar beets arean annual crop, so plantings can be estimated in the spring and followed throughout the year. Because the European crop accounts forso much of the world’s production and the cane crop is harvestedall year long, the beet crop critically influences the supply-demandequation.
SupplyThe statistical sugar season begins September 1 and ends August 31.Like all food commodities, year-end stocks play a big role in priceanalysis. So does estimated production. The first official indicationof the size of the new crop each year is made by F. O. Licht’s estimates of European sugar beet plantings. The first estimate of the total world crop is not released until October of each year.The supply side of the supply-demand equation is further distorted by the impact of competitive products. High-fructose cornsyrup (HFCS) is a popular sweetener as a result of depressed cornprices. Also competing with sugar are such nonnutritive sweeteners as aspartame (NutraSweet), saccharin, acesulfame K, and sucralose.
DemandSugar consumption has grown steadily over the years, usually averaging about 2 to 3 percent a year. Since sugar has a well-definedusage pattern, it is relatively easy to project consumption from yearto year. Total world consumption during the last 7 years of the 1990sgrew from 112 million to 129 million tons. Although consumptionwas flat in marketing year (MY) 1994–1995 compared with MY1993–1994, there was a jump of about 6 million tons in MY 1995 –1996 and an increase of about 3 million tons each year throughMY1999–2000.
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Reasons for the steady pattern are:1. Governments exercise strict controls on sugar prices inmany countries by limiting imports. Only about 27 percentof the world’s annual usage requirements are traded onthe free market. Domestic usage by producing countries ishigh.2. There is no substitute for its use in many products.3. Even when HFCS can be substituted, this is done reluct