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THE HIGHTOWER REPORT
141 W. Jackson Blvd.,
Ste. 1520A,
Chicago, Illinois
(June 11, 1997) CATTLE: The psychology in the cattle market has turned quite negative over the past few weeks as August cattle broke 268 points off of the May highs. The near-term bearish fundamental "news" in the market is driving futures lower as large on-feed supplies and talk of a seasonal decline in demand after retailers have booked 4th of July features has triggered the start of a fund and speculative liquidation break. Looking at the "big picture" fundamentals, the outlook into the summer may not be as bearish as the general market expectations. While most traders believe that a seasonal decline in demand is the major cause for the tendency in the market to establish a high in the spring and break into the summer, there is more evidence that a seasonal supply shift is the real culprit. Normally, beef production increase by 200 to 400 million pounds into the 3rd quarter. The current USDA forecast for 3rd quarter beef production is very close to the 2nd quarter number. This study would indicate that the market in 1997 may follow a contra-seasonal pattern. Analogous years include 1972, 1973, 1978, 1986 and 1996. The current negative trade psychology is based on concerns that the current high level of cattle on feedlots. On-feed supplies are up 12% from the 5-year average for this time of the year. Traders are also concerned that if demand slows, these cattle will quickly increase weight and cause beef production to rise above expectations. Feedlots are current with marketings at present and with beef holding a strong discount to pork, and profit margins high, packer demand should remain strong over the near-term. The above study would indicate that supplies are not going to get any larger than present supplies as a drop in non-fed slaughter and reduced cow and calve slaughter keep production stable into the 3rd quarter. In other words, "it doesn't get any more bearish than now." In addition, the heifer supply on feedlots are up 19% from last year and up 24% from two years ago. This will keep average weights down below expectations.
SUGGESTED TRADING STRATEGIES--Buy August cattle at 63.70 with an objective of 66.15. Risk the trade to 62.90.
For daily market analysis 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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