COMMODITY INSIGHT GENERAL OUTLOOK Prepared by Commodity Insight
(November 20, 2000) The cattle industry will not be hampered by burdensome supplies in 2001. That is an abrupt change from what was experienced over the past nine months. Consequently, the stage is set for a dynamic bull market to unfold in the months and more than likely the years ahead.
According to the USDA October cattle placement rates were estimated to be 9% below last year and 3% below the 5 year average. That means October placements were the smallest since 1995, significantly below what took place during most of this year.
It can be assumed therefore, that burdensome cattle supplies in 2001 will not be a "lid" keeping price rallies in check. The only fundamental capable of keeping rallies in check in 2001 and beyond will be slumping demand. If demand wanes prices will break. If it does not, cattle prices will continue upward.
Fortunately, the cattle market has been able to overcome the heavy supplies of the past few months and still work higher because demand has indeed been brisk. This week for example, cattle futures ended at their loftiest levels since early June. The cattle market rallied right into a bullish Cattle on Feed report!
In September, cattle prices were actually at contract lows and acting heavy. Burdensome slaughter rates and questionable demand had pounded prices to lower levels. But rising demand put a bottom in the market despite ugly fundamentals and prices have been moving upward ever since.
More impressive is the fact that demand for beef held up exceptionally well right into the "turkey and ham" season of the Holidays. Demand for beef is much stronger than most analysts anticipated.
Many attribute the outstanding demand for beef to such fundamentals as an employment rate at a 30-year low in the U.S. and "eye popping" exports to foreign countries. That potent "one-two" punch is the reason cattle prices are now at their highest levels in 6 months.
There are other fundamentals at work in today's marketplace that are also bullish for the cattle market. One, for instance, being Mother Nature. With cattle supplies finally on the decline, a harsh and exceptionally severe winter could push prices dramatically upward by spring. Mother Nature could add $5 to cattle prices within the blink of an eye.
But the most bullish long-term fundamental rests with producers. Once they become convinced that high priced cattle are here to stay, they will begin to expand production by withholding heifers from the market in order to breed them. The result will be even fewer cattle available for slaughter and thus, higher prices.
The long awaited, dynamic, historic bull move for cattle prices is underway. It began in September, when prices were at contract lows and was confirmed by this weeks Cattle on Feed report showing October placements 9% below last year and 3% below the 5 year average.
Interestingly enough, another force has surfaced over the past few months that will also support cattle prices on a break. That force is one rising hard asset values while paper asset values struggle.
For instance, the Goldman Sachs index rose just rose to its 2nd highest level in 10 years along with crude oil, heating oil and gasoline. And natural gas prices rose to levels never before seen in history.
At the same time, the NASDAQ here in the U.S. and the Japanese equity market, the Nikkei, fell to their lowest levels since the spring of 1999 . The Dow Jones, unless a stiff rally soon unfolds, should quickly follow the lead of the Nikkei an the NASDAQ to lower levels.
The ag-markets as measured by the CRB index ended the week at a one month high. If the Goldman Sachs index continues upward, the odds are great the CRB will move higher yet. After all, in mid October, the CRB rose to a 2-year high. In other words, the ag and non-ag markets are trending higher. That particular situation has not been seen in a long, long time.
The dominate scenario in today's, marketplace at this time is one of rising hard assets and declining paper assets. That is absolute fact!
In such a scenario commodity markets with long-term bullish fundamentals will flourish. Markets such as cattle and wheat.
November 20, 2000 Jerry F. Welch, Publisher Commodity Insight 152 Ennis Lake Road, Ennis, Montana 406-682-5225
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