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IRA EPSTEIN & COMPANY
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(August 14, 1997) LIVE CATTLE: The feeder cattle and the corn markets are very closely linked. While they may not move tick for tick, they do pay close attention to what the other is doing. This past Tuesday was a great example of this!
Traders this week have a number of fundamental factors to absorb in the cattle market. First, traders started the week looking for cash cattle to trade at $64.00. As usual Monday was quiet in the cash markets as packers and feedlots were at a standoff. Late Tuesday we saw light cash market trading at $64.00. However, when cash cattle started to trade actively on Wednesday, reaching $65.00, a dollar higher than the market anticipated.
Tuesday brought the release of the USDA August Crop Production report. Many traders expected the USDA estimate of the 1997 corn crop to be in the area of 9.553 billion bushels. Instead the hot dry weather farmers have experienced in the central Corn Belt seems to be taking its toll. The USDA estimates the 1997 corn crop to be approximately 9.276 billion bushels, 424 million bushels below last months estimate! With this news the December corn futures opened and locked limit up. Feeder cattle traders reacted to the Crop report and eventually took the front month feeder cattle limit down.
It never ceases to amaze me how fast things can change in the futures markets. Wednesday, after a night to think about the crop report, I believe traders said to themselves “Hey...wait a minute..didn't it rain over the weekend?” After a sharply higher open, the corn market pared gains and closed near their low. This allowed the cattle futures to rally. October feeder cattle Futures were able to regain 117 points and the October live cattle moved 30 points higher.
–This week, cash cattle traded actively at $65.00 whereas most traders had expected $64.00.
–Rain in the central Corn Belt, I believe, will ultimately weigh on feed prices.
–The USDA's Seven State Cattle On Feed report is due out Friday at 2:00 central time. I believe traders are pricing in a neutral to friendly report. According to Futures Worlds News, the average estimate of all cattle on feed is 115.5% compared to year ago levels. The average estimate for placements is 100% compared to year ago levels. And the average estimate for marketings is 105.4%, compared to year ago levels.
RECOMMENDATIONS–With Labor Day less than three weeks away, I believe packers will have one more buying spree before the summer is over. Traders who followed my buy recommendation in the October live cattle contract in the area of $69.20 to $69.05, should use a stop just below the $69.00 level. With the Cattle On Feed report to be released on Friday, traders should consider taking profits rather than holding the October cattle through the report.
Last week, I recommended buying $82.00 October feeder cattle calls options. I still like this recommendation.
Long-term traders may find this interesting. According to Moore Research of Eugene OR., if you had bought the December live cattle and sold June live cattle on August 21st, give or take a day, and held them until November 12th, 14 out of 15 years you would have had a profitable trade. However this doesn't mean it will work this year. Nothing works forever.
Les Jones
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