wmeubank@ocp.kcmo.com
(May 7, 1997) LIVE CATTLE: <169>VIEW FROM THE PIT<170>--After a $68.00 live cattle trade last week coupled with heavy volume, we began the week with packers saying that they were in good shape and bidding $67.00. The name of the game, however, was <169>degree of currentness<170> and producers simply felt that at this time the ball was in their court. After a somewhat feeble attempt Tuesday morning to back away from the $68.00 bids and pull back to $67.00 we saw the market break open mid-morning and by about 11:00 AM every packer was paying $69.00. This again produced a heavy trade and as of today all that remains is a clean up trade. In my opinion the main component creating this strength has been the lack of finish on the majority of the cattle we are killing. This situation was exacerbated even further with the snowstorms in the Panhandle 2 weeks ago. I continue to hear stories about how many of the cattle from these areas were weighing 30 to 50 pounds less than was expected. I believe that the entire packing industry is presently feeling the effects of cattle that lack finish. This creates two main problems for them that temporarily aids the producer.
(1) Although there are plenty of cattle out there, it is in each packers best interest to get the first cut cattle. That means that for a short while we are actually seeing the major packers compete with one another. This is most obvious by recognizing that packers are suddenly buying cattle several days earlier in the week than has been their custom.
(2) Because of the lack of finish on many of these cattle, it is not in the best interest of these packers to call for their contract cattle early. Although they still continue to gain an extra $2.00 from those producers foolish enough to have contracted May cattle, a high percentage of these cattle simply do not have enough finish to be called for early. This radically reduces the packers ability to use these cattle as a weapon to reduce present live cattle prices.
At this time I must again commend the industry on doing an excellent job of remaining current, however, I continue to believe that we simply have too many cattle coming for the next 60 days. Even though we remain current we are already seeing the early sign of the main problem. Federally inspected slaughter last week was 703,000 versus 699,000 head the week before. For the first 3 days of this week we see the slaughter at 402,000 head versus 391,000 last week and 393,000 last year. I am also hearing expectations of heavier slaughter this Saturday. Beef demand has been outstanding, receiving help from very high priced pork, however, I believe we are rapidly coming to the end of the line on this also. I have told everybody that would listen that, in my opinion, wherever the boxed beef prices topped out this week, that would be the highest prices we will see for the next 3 to 4 months. Yesterday's price on lightweight choice boxed beef was $108.86 which showed a 4-day increase of $3.44 over last week. I now believe that the bulk of the fill in buying for Memorial Day is near finished and we will see a significant set back in boxed beef prices. Even allowing for a reduction in cow slaughter, I still expect us to maintain slaughter levels around 740,000 head during June which should give us total beef production numbers of about 515 million pounds per week. This is slightly above last year, but almost 5% above the past 5-year average. In my opinion, this will give us a cash cattle market during June in the $62.00 to $63.00 area.
I repeatedly am hearing comments from producers about the numbers of empty pens that have increased. While I am not disagreeing with these statements, I believe it is very easy for people to be misled. I expect the total cattle on feed as of May 1 to be 8% to 10% above last year which will be about 12% above the 5-year average. The empty pens are showing up because placements of cattle into the feedlots during April and May are much lighter than normal. Bear in mind that 2nd quarter placements last year were incredibly low due to $5.00 plus corn. Even though I expect April placements to be above last year, they will still be very low. If April placements are 5% above last year, they are still 14% below the previous 5-year average. The result of all this is a good deal of empty pen space, <169>but,<170> a glut of cattle needing to be moved in the next 60 days.
The strength in the cash market marked this week has not produced a corresponding strength in June futures. Remember, yesterday we saw cash cattle trade briskly at $69.00, $1.00 over last week with boxed beef prices at $3.44 over last week. These past 4 days saw June futures trade in a very tight range of $65.65 to $65.07. In my opinion, the fact that June futures cannot gain strength with the good news of the cash markets confirms my opinion of the weakness for June. I have been, and will continue to sell any further rallies in June futures (June only).
I mentioned last week that I felt feeders have been doing everything in their power to avoid cattle finishing in the summer. Although I continue to believe that August futures will sell off with the June, I believe that ultimately people will realize that there will be a large hole in cattle numbers this fall and that perhaps the August cattle are under-priced. For this reason, I have rolled all of my previous August short positions into June. The trade I continue to like best is our short June/long October spreads. I continue to believe that the radically reduced cow slaughter coupled with the light 2nd quarter placements will create a live cattle market this fall in the low to mid-$70's. This spread traded as low this week as +340 before closing today at +375. I continue to expect to see this spread trade with October futures well in excess of 500 points above June. A 150-point move in a spread is $600.00 while the margin for a spread is only $350.00 each.
Let me also take a quick minute of your time to tell you how optimistic I feel about the new direction our industry is going. During this past week all of the major packers announced new product lines moving towards more consistent quality; easier preparation; precooked, micro-waveable meat; smaller, safer, better packaging; etc., etc. I am absolutely elated about this development and I commend these packers for finally waking up and defending our product. I expect the effects of this progress to be reflected as increased beef demand in the not too distant future.
We are now seeing the effects of the futures anticipating the changes in the cash market. Changes in wholesale beef and live cattle will trigger these moves. Trading floor knowledge is needed for proper execution and entry into these markets. 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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