BARNES BROKERAGE CO., INC.

30 S. Wacker, Chicago, Illinois

(December 3, 1997) LIVE CATTLE: “VIEW FROM THE PIT”–Due to my travel schedule and the Thanksgiving holiday, it has been 3 weeks since our last market letter and during that time with the exception of only 2 days, we have seen both the live cattle market and the futures remain in a $1.00 range. Last week saw the week begin in typical fashion with no trade on Monday or Tuesday, packers bidding $66.00 and producers asking $68.00. Wednesday morning saw things break loose at $67.00 as Nebraska gave in first which then forced Kansas and Texas to take the $67.00 also. After a brief 1 to 2 hour trade, business was done and by the end of the week packers were talking $65.00 to $66.00 for the coming week (this week). As expected, this week began with most packers bidding $65.00 and $66.00 with the exception of the one major packer who was only bidding $64.00. Add to this equation a major packer promotion about how bad the beef is, how much money per head the packers were losing, and how many contact and formula cattle they could call for after December 1, and it became very questionable if we could sell cattle for any price at all. Aided by the threat of potentially severe weather in the Panhandle, Tuesday afternoon saw an all too seldom producer mini-victory as every packer came to the table with $67.00. The $67.00 trade continued into early Wednesday and as of this afternoon we see packers claiming to be bought well into next week with bids again pulled back to $65.00 and $66.00. Volume for the week appears to be moderate with showlists for next week appearing about the same as this week. Boxed beef prices have come under continued pressure as we see today's price on lightweight choice boxes at $101.64 which is $1.87 under last Wednesday, however today's volume of over 500 loads of fabricated cuts and trimmings appears to be an indication of a “bottoming out” of beef prices.

At the present time feedlots remain with an ample supply of cattle on feed but in my opinion this is not telling the entire story. These cattle are the result of heavy third quarter placements but I continue to believe that we are aggressively marketing our way through these numbers. Placements of cattle into feedlots during October were 4% under last year and I expect that placement figure to be the beginning of a very long-term string of fewer placements than the previous year. Per the USDA July 1 semi- annual Cattle Inventory report, we showed over 1½ million fewer cattle under 500 pounds. This shortage will result in sharply reduced feedlot placements over the future that should result in sharply higher live cattle prices by February.

While we seem to have a few more finished cattle in Nebraska, I continue to believe that we remain extremely current in Texas and Kansas. I believe we are marketing “green” cattle throughout the Panhandle and packers are doing everything in their power to pull contract and formula cattle early in order to keep pressure on the market.

December and February futures closed under pressure today with December at $66.82 and February at a new 1997 low closing price of $67.30. I consider both of these futures contracts to be offering us an excellent buying opportunity with my choice of these two at this time being the December. I continue to hear about today's cattle averaging under 45% choice which confirms to me that December futures belong at least $2.00 premium to today's cash market. The futures contract requires 55% choice. This means that if we maintain a $67.00 live cattle market, December futures belong trading at $69.00. At $67.30 I also believe the February futures are radically underpriced. As I said earlier, per the semi-annual inventory report we had 1½ million fewer cattle under 500 pounds than last year. This will create a major shortage of finished cattle beginning in February. Add to that the probability of “El Nino's” nasty weather and we have the makings for an explosion. Producers should see evidence of packers perception of this situation right now as we see how aggressively they are trying to lock in “formula” or “contract” purchases. I believe we can easily see a $2,000.00 per contract rally in February and April futures if the industry can just avoid destroying themselves with “captive supplies.”

We also continue to remain in our long February/short June spreads which closed today at —225. We have also added to our long December/short June spreads which closed today at —272. I continue to believe that we will soon see both of these reverse and gain $1,200.00 to $1,500.00 per spread on the June.

On average, most cattle finishings today are losing $50.00 to $100.00 per head. Producers continue to ask their associations “why” and are given a litany of answers, most of which continue to dodge the real answer. Yes, there are many issues that need to be addressed by the industry, but in my opinion it continues to ignore the single most important problem, the worst marketing system of any product in the world today. For example: as of this afternoon we see that 80,000 head have been marketed in Kansas, 30,600 of which were previously contracted or formulated. How can you possibly make a packer pay higher for cattle when he can call for almost 40% of his needs without bidding. Our associations refuse to face one of the two main problems in our industry, one of which is the loss of market share of beef, which they recognize, the other is the loss of the producer share of the total beef dollar, which they ignore. Per the Economic Research Service of the USDA, during the first half of 1993 the producers share of the total beef dollar was 59%. During the third quarter of 1997 the producers share was 49%. The major portion of this percentage loss came in the second quarter of 1994 when there was a substantial escalation of formula and contract cattle. This 10% difference in producer share amounts to $78.75 per head. I urge every producer: Don't blame the packer; they are just doing their job a lot better than you. Make noise. Insist that your associations take a stand again captive supply. Unless you do, you will never see a good market again.

Live cattle and wholesale beef information will trigger a turn. Stay in contact. Stay current. Keep selling cash cattle on the open market.

Les Messinger

Consensus National Futures and Financial On Line Index

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