THE HIGHTOWER REPORT
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800-662-9346(October 25, 1999) CATTLE: The near-term outlook for the cattle market remains positive, as demand factors continue to override large beef production. The monthly Cattle on Feed report for October 1st indicated on-feed supplies at 105% of last year. Placements were 104% of last year for September and marketings were 107% of last year. While well below estimates, placements were still 107.7% of the 5-year average, but marketings were 109%. With weekly beef production still running well above last year's pace, beef prices are up 13% from last year and reached the highest level since November of 1996 last week. This has kept packer profit margins wide enough to encourage active movement of beef through the pipeline. As of this writing, cash prices looked like they would trade near 72.00 last week, which would leave December cattle at a discount to the cash market.
Traders are now getting concerned that supply may not be able to keep up with strong packer demand into late October and early November. Consumers, hotels, restaurants, and even institutions (government agencies, schools, etc.) are attempting to hold a little more inventory into the end of the year. This shift in pipeline demand should be enough to keep beef prices and cash cattle prices in an uptrend into early December. Keep in mind that this is not new consumption, but just a shift in pipeline demand. While temporary, this shift in demand can have a very positive influence on prices. However, once the pipeline is full by the end of the year, inventory demand could fall like a rock for early 2000. In addition, with wholesalers concerned with distribution problems for early January, very little beef is expected to move. Another theory which is making the rounds in the pit regarding the increased beef demand recently is the surge in popularity of the Atkins diet. This diet recommends a drastic reduction in carbohydrates (bread and pasta) and is centered around high protein consumption, i.e., beef consumption.
Non-fed slaughter is down, grain prices are cheap and cow slaughter levels are also coming down. In addition, a record hay crop in the U.S. this year should keep seasonal slaughter of non-fed cattle slow. Heifer slaughter has been running very high for much of 1999, and this factor could also change soon as cow/calf operators begin to show steadier profits. Even in the last monthly USDA Supply/Demand report, beef production for the 4th quarter was pegged at 6.35 billion pounds, down 500 million from the third quarter. This is the largest decrease in beef production into the 4th quarter since at least 1982. This shift in supply should also be a supportive factor. The export picture is also beginning to turn a little more positive with a sharp recovery now expected in Asia and the Mexico economy coming around. The USDA attache in South Korea last week indicated that beef consumption in 2000 is expected to grow to 505,000 tonnes, up 18,000 from this year, while beef production should drop to 255,000 tonnes from 310,000 in 1999.
While slightly overbought, the structure of the market is still positive as small traders continue to fight the uptrend and attempt to hold a net short position and large traders (funds) continue to buy. With this positive structure, and futures at a discount to the cash market, the market appears to have more upside potential.
SUGGESTED TRADING STRATEGIES--1) Buy December cattle at 8.22 with an objective of 67.80. Risk the trade to 67.20 2) Buy December and sell February cattle at -25 December with an objective of +195 December. Risk the trade to a close under -55 December.
For daily market updates of the Hightower Report of comprehensive Commodity Research, call 900-225-2200, extension 4 for Livestock Market Forecast. The cost per minute is $1.33.
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