A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
314-955-3050
(March 9, 2000) CATTLE: Cattle slaughter should reach its annual low (outside of holiday-shortened weeks) later this month, then rise during spring. We use the 10-year average on the chart to illustrate the usual second-quarter increase in kill rates. We also plot 1999 and 2000 slaughter for comparison purposes. The feedlot population has consistently set records in recent months, with the February 1 total in the seven major cattle-feeding states being 10.9% and 7.7%, respectively, over year-ago and previous record levels. Given the huge supply, we believe the industry will be forced to market extremely large numbers this spring and summer.
Weekly Cattle Slaughter
However, futures traders obviously expect strong buying during the months ahead. Bulls hope demand reaches levels similar to that experienced last autumn, which would in turn support prices. June cattle often traded 50-100 points over cash prices during much of January and February. August futures have traded at even larger premiums. These premiums seem to ignore the strong tendency for cash cattle prices to decline into summer.
In fact, we believe such premiums are counter-productive and possibly self-defeating. That is, by keeping the summer contracts above the late winter-early spring cash market, the futures market is encouraging producers to increase production.
The table details the results of pricing of June cattle futures within 200 points of early March cash prices during the past 20 years. It shows June traded over spot in eight years, with minor discounts in three others. The average decline from early March to the March-May low averaged $6.07/cwt during those eleven years. The decline in the nine years of sharp June discounts averaged only $2.86.
June Cattle Futures
We were recently able to enter the previously recommended October/June cattle spread. We are also short June cattle futures from 68.70. Our stop is 70.05; our initial objective is 65.75.
If we are correct in thinking the fed cattle market is vulnerable to a second-quarter breakdown, then the feeder market will probably decline as well. Seasonal patterns show yearling prices tend to decline from a January top to a low in the May-June period. That tendency would be exacerbated by disappointing live cattle prices. We continue to hold the April cattle/April feeder cattle spread in anticipation of a weakening feeder market.
Dan Vaught