LFG, LLC
233 S. Wacker Dr., Ste. 2400, Chicago, Illinois
312-441-6000(October, 1999) CATTLE: The cattle and feeder cattle markets have been trending higher since mid-July. Strong demand for beef has been the big supportive influence to the cash cattle and wholesale boxed beef prices. The cash cattle market has broke out of a narrow six month trading range that encompassed 62.00-67.00 in the Texas and Kansas feedlots. Wholesale boxed beef prices have also seen an impressive rally and are currently trading 20.00 cwt. above year-ago levels. The rally has been impressive considering we have record supplies of cattle on feed and large completing supplies of pork and poultry.
If there was one factor that has been supportive to the cattle market, it has been demand. While supply can be estimated as a means to forecast price, demand is not so easy to quantify. As a result, as proven this year, large supplies do not necessarily mean low prices. Just as easily, tight supplies don't always yield higher prices. Large placements of cattle on feed in the first half of the year had traders concerned about negative price possibilities in the late 3rd and into the 4th quarter. Average carcass weights have been at historically high levels for the second year in a row. Bearish attitudes at the feedlot though, has caused cattle feeders to keep cattle moving to market on a timely basis. This has been reflected in the grade out, showing tight supplies of choice beef relative to larger supplies of cheaper grade select. Demand for choice beef has been very strong, especially from the HRI business sector. Restaurants have reported brisk business this year, which can be attributed to the strong economy, greater expendable income, and planned special celebrations for the end of the year. Out front bookings have been extensive for middle meat beef carcass items.
Wholesale beef prices and live cattle prices are probably due for a minor correction, which should take place between mid to late October through mid-November. Live cattle prices can decline to the 67.00 level basis the Texas and Kansas markets. Light weight choice cut-out values could see a setback to 115.00-113.00. If the beef market leads the decline, beef packers will see profit margins shrink to the point where they might cut back slaughter. The futures market would not take kindly to these developments. At press time December cattle futures were trading at a 150-200 point discount to cash. The board is clearly anticipating a dip in the cash market. If the live cattle prices stay at 70.00 or higher through the 3rd week of October, December cattle will make another run to contract highs near the 70.60 level. While I believe the futures market will experience a dip, the best way to be involved is to buy 175-225 point breaks off the recent highs in the February and April contracts. April cattle can widen out to a 250-300 premium to December. There is support for the spread at 130-100. Upside potential for February cattle is 72.00-72.50 with April projecting to 75.00. Reduced placements should support February and April cattle. The trend for cattle and feeder cattle is up.
Phil Stanley
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