BARNES BROKERAGE CO., INC.

30 S. Wacker, Chicago, Illinois

(December 17, 1997) LIVE CATTLE: “VIEW FROM THE PIT”–It is now Wednesday afternoon and to nobody's surprise there has been very little cattle trade in Kansas and Texas with Nebraska showing a moderate trade at $104.00 to $105.00. Packers began the week bidding $63.00 and $64.00 while producers asked $66.00 and $67.00. Although I believe that packers could have bought cattle on Monday and Tuesday for $65.00 they chose to remain at $64.00 expecting to get help from a weak futures market. Instead, however, futures did not follow their expected path and December rallied $1.880 on Monday and Tuesday providing producers with additional encouragement. This, plus the threat of severe weather has now caused packer bids to increase to $65.00 but at this point I am happy to say that most of these bids are being passed. I expect to see the main cattle trade occur tomorrow at $66.00.

Our main problem at this time appears to be a sloppy beef trade which shows today's boxed beef at $101.70 which is $1.76 under last week's price despite a packer reduction in cattle slaughter. I believe we are presently in a period of abundant “up-front” cattle numbers which makes it absolutely mandatory that we quickly increase our present reduced slaughter rates. Another negative factor affecting today's boxed beef trade is the popular opinion that our beef exports will be sharply reduced due to the Asian financial crisis.

Despite these very real concerns, I remain optimistic on our upcoming cattle market. On Friday, December 19, we will see the December 1 seven-state Cattle on Feed report and while I expect it to show about 8% more cattle on feed, I also expect it to show 8% to 10% smaller placements of cattle into the feedlots. At current prices, beef competes very well at the retail counter and I expect to see many major retail beef features beginning after the New Year. Assuming that this occurs, I expect to see our weekly slaughter figures quickly rebound to almost 700,000 head per week. While I agree with most analysts that are calling for an over-supply of cattle for January, I do not agree with the majority opinions that believe these cattle will be burdensome through the end of the first quarter. Most of these opinions seem to be based on the over-supply coming as a result of the heavy third quarter placements. In my opinion, further analysis of these placements disputes this thinking. Although total third quarter placements ran 7% over last year, we see that an examination of the placement weights show a 20% increase in placements of cattle over 800 pounds. This confirms that the majority of these placements were yearlings and will be dead before February. Per the July 1 cattle inventory, we are showing 1½ million fewer feeder cattle which will reflect in sharply lower placements over the next year. This reduction in placements began with 4% less placements in October and I expect to see this placement reduction reflected in tighter finished cattle numbers beginning in February. Further evidence of this can be seen by the aggressive actions of packers to lock in larger numbers of cattle supplies. I am also encouraged by my opinion that although packers have abundant formula and contract cattle for December and January, they are running into resistance from February on out.

We saw December and February futures break severely earlier this week to $65.30 and $65.15. During the past 2 days they have rallied back sharply to close today at $67.25 and $66.65. I continue to believe that December futures belong at least $2.00 premium to the cash trade and since I expect to see a $66.00 live market this week, I believe December futures belong at $68.00. I have added to these positions and we remain long. We have also used the pressure on February to add to our already long positions. While I acknowledge plentiful supplies near term, I expect to see good beef demand, resumption of increased exports, and an overall recognition of better markets to come. Add to that the potential of El Nino and/or severe weather and I see the potential for a $2,000.00 per contract increase in February futures.

We remain in a holding pattern with our long February/short June spreads which closed today at —237. I continue to believe that we will eventually see this spread reverse with February going to +100 over June for a $1,300.00 per spread move. Our long December/short June spread gained about $500.00 per spread this week as it went from —300 to —177. We have good profits on this spread and I haven't decided yet whether I will simply liquidate this position or I will convert it to the long February/short June.

At this time I must correct a major mathematical error that I made in my last letter. You probably remember that I remain extremely critical of our cattle association for not taking a stand against selling cattle on a formula or contract basis. The attitudes of most of our association leaders continues to be that captive supply has little or no effect on live cattle prices. In my opinion, this is the equivalent of an ostrich with his head buried in the sand. I certainly do not deny that a major problem the beef industry faces is beef's loss of market share of the overall meat trade, however this loss in market share is offset by the fact that today's total herd size (per USDA July 1 inventory) is under 109 million head compared to when the total herd size was over 135 million.

More important to the individual cattle producer is the producer's share of the total beef dollar. Per the USDA Economic Research Service, 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%. In my last letter I said that this 10% difference to the producer represented $78.75 per head. My mathematical mistake was that this difference is actually $160.00 per head. This is not my opinion, these are actual numbers published by the USDA. If the cattle feeder received the same percentage of the total beef dollar that he received in early 1993, he would receive an additional $160.00 per head. This turns an $80.00 per head loss into an $80.00 per head profit. People keep asking me, “where has that $160.00 per head gone?” I cannot say, but here are a couple of interesting numbers. Retail beef profits are currently the highest in history. From 1993 through 1995 the top 3 major packers all showed record profits. In 1993 the gross profit of IBP was a little over $258 million. In 1995 their profit was a record $604 million posting a 2-year increase of 134%. (Gross profits in 1996 showed a 26% decrease from 1995.) In my mind there is absolutely no question that the packer use contract and formula cattle allows them to beat the live cattle price down $50.00 to $60.00 per head during periods of tight supply and $90.00 to $120.00 per head during periods of plentiful supply. Every association meeting discusses “beef's market share” (as they should), but ignores the producers' share of the total beef dollar. I strongly suggest that all responsible cattle feeders and NCBA members make it a point to insist that the subject of “producers' share of the total beef dollar” become a subject at the upcoming NCBA annual meeting.

These markets remain extremely volatile and this volatility means “entry opportunity.” Live cattle and wholesale beef information remain a necessity. 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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