ROSENTHAL COLLINS FUTURES
30 S. Wacker, Suite 1213, Chicago, Illinois
800-624-6572(March 15, 2000) CATTLE: "VIEW FROM THE PIT"--It has been three weeks since my last letter (February 23) and I am very pleased to report that since that date both the live cattle trade and the futures have behaved quite nicely. At that time we were looking at a live cattle trade of $68.00 with April futures at $69.87 and lightweight choice boxed beef trade at $109.99. My recommendation at that time was a very strong "add to existing long positions in April live cattle futures and roll any remaining long February positions into long April. I continue to believe we will see a $1,200 to $1,600 per contract move in this contract." I further pointed out that my bullish opinions were based mainly on two main livestock fundamentals, "1.) Beef demand along with exports remains extremely strong and 2.) Retail and packer profits remain at incredibly high levels which should certainly keep them killing cattle as aggressively as possible."
I am now extremely happy to report that since that letter we have seen a $4 rally in the live cattle cash trade ($68 to $72), a $11.63 rally in the lightweight choice boxed beef ($109.99 to $121.62) and a $2.90 ($1,160 per contract) rally in April live cattle futures ($69.87 to $72.77).
Many analysts continue to talk about too many cattle on feed and how we cannot hold the boxed beef price, but most of these are the same ones that expected us to be trading cattle today at $68. On Friday, March 17, we will see the March 1 Seven State Cattle on Feed report and again all expectations point towards this being a very bearish report. Early estimates show total on feed at 109 to 110, February placements at 103 to 104 and February marketings at 108 to 109. I continue to believe that most of these analysts that remain bearish keep making the mistake of emphasizing the total cattle on feed and the placements while in my opinion the most important number remains the marketings. We have just seen six months of heavy placements, however a more in depth analysis of those placements show an extraordinary high percentage of lightweight calves in the mix. Even today despite a recent 11-cent rally in corn prices, the safest cattle feeding would involve placing lighter weight calves on feed to take advantage of a $73.50 December live cattle futures market. I recently placed 400 to 450 pound heifers on feed that I do not expect to be finished cattle for almost a full year. My point in mentioning this is to again point out the fact that when you have a high percentage of lighter weight calves being placed on feed it radically distorts the total cattle on feed numbers and makes it very difficult to accurately predict when the majority of these calves will eventually come to market.
We finished last week with a solid $72 live cattle trade. As expected this allowed us to begin this week with packers bidding $71 and producers offering cattle at $73 to $74. As of today (Wednesday P.M.) the only trade we see in Texas and Kansas are the usual 77,000 head that packers can pick up without competing. Fortunately we continue to be assured by many of our industry leaders that this practice has little or no effect on the cash cattle trade. I wonder if these so called leaders also believe in Santa Clause and the tooth fairy? The main bear argument for the live cattle is a valid one centering around packer predictions that although the boxed beef trade is very strong, it cannot hold these levels and they expect it to re-trace several dollars over the immediate near term. Well, big deal! Today's combined choice and select boxed beef price is the highest we have seen since the freeze of 1993 when we had an $85 live cattle trade. From 1993 through 1997 we saw the live cattle price remain a fairly steady 64% of lightweight choice boxed beef price. This remains the clearest barometer telling the producer how much of the total wholesale beef dollar the packer will sham. At today's choice boxed beef price of $121.62 if the packer paid the producer that same average of 64%, that would mean the live cattle trade would now be at about $78. If this week's trade develops at $72 it means we are now receiving 59% of the boxed beef price or $72 per head less than our 1993 to 1998 average. That, my friends is what record packer profits are made of and the main tool by which they have accomplished this feat is called "Captive Supplies."
The point of this is to say, "Yes," I agree that we will see beef re-trace several dollars. It has increased $5.25 since last Wednesday. If the beef backs off by $4.00 to $117.50 and the packer paid us the same 64% of the boxed beef price that he paid during prior record years of 1995, 1996 and 1997, we would still be looking at a live cattle market of over $75.00. Packers and retailers remain incredibly profitable; Beef demand remains incredibly strong; Beef exports in 1999 were again at a record increase showing volume up 8.9% and value up over 14%. In my opinion these remain the key factors of the cattle market over the near term I expect to see available numbers get considerably tighter over the next 45 days which should push us to a $73 to $74 live cattle market. When this occurs I expect to see April futures trade at $74 to $75. My recommendation remains, add to long positions in April futures on any interim trading set backs.
As you know, my opinions are totally different regarding June and August live cattle While I will acknowledge that I cannot remember a major bear market made up of a high percentage of calves the facts still point towards the majority of the cattle now in the feedlots finishing during the June to August period.. For this reason I will use the near-term rally that I am forecasting to establish hedges in both June and August cattle.
Our long April/short June spreads have performed quite nicely over the past few weeks closing today with April +330 over June. This spread has moved 125 points or $500 per spread in the past few weeks and although it is now in the area I anticipated, I believe it has more left. We are taking profits on a portion of these spreads near these levels, but will leave enough of them on to keep our interest.
My other major recommendation remains to buy May feeder futures which traded today at $83.50. I previously recommended buying this contract at these prices and watched as it traded earlier this month as high as $85.75. A recent 11-cent rally in corn has caused this contract to re-trace all the way back and in my opinion that remains a major over-reaction May feeders become October finished cattle and October live cattle are now trading at $72.17, $2.72 over the August live cattle. I also do not believe that we have substantial numbers on wheat pasture and I believe the increases in placements that we have seen every month are "borrowing" feeder cattle forward. I continue to believe we will soon see May feeders trade $4 to $5 ($2,000 to $2,500) per contract higher.
The recent volatility has created many entry opportunities and I expect this to continue. Live cattle and beef information remains the key. Stay in contact to know what we are doing now. Stay current. Keep selling cash cattle on the open market.
Les Messinger
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