IRA EPSTEIN & COMPANY
223 West Jackson, 7th Floor, Chicago, Illinois
(October 29, 1997) LIVE CATTLE/FEEDER CATTLE: What a mess! Last week everything looked pretty good with cash trades coming in at $68.00 and demand from packers appearing fairly strong. I spent the weekend following the weather, watching storms hit the plains states. I was looking for bullish sentiment in the cattle markets. A rally seemed likely for Monday morning until I heard reports early Monday morning that the financial markets had crashed in Hong Kong!
Novice traders might ask what financial markets have to do with livestock markets. Well, the U.S. exports a lot of beef around the world, including Asia. With Asian currency markets in turmoil our dollar has gained significant value against many foreign currencies making our goods more expensive. With the world stock and currency markets in decline there has been talk of economic slow downs (recessions) in Asia. The amount of goods Asians purchase from Europe and us could create a trickle back effect to our economy. When money is tight do you eat steak or hamburger? Granted the effects would be months off, but the futures markets usually react immediately to the smallest tidbits of news.
Also, most funds and investors diversify into many markets. When fund managers or speculators find themselves on margin call in one market, they may decide to liquidate in another market to meet that call. Consequently, you may see pressure on the commodities as well as other markets. With the low volume in the cattle markets earlier this week, I imagine a lot of trader's time this week was spent watching the Dow Jones and S&P 500 indexes instead of paying closer attention to more relative matters.
Which brings me to the cash markets. Last weekend's blizzard wreaked havoc on the cattle complex. Not only were many cattle lost in the deluge, but possibly two or three weeks worth of weight taken off. In last week's report I discussed reasons why supplies may be tight through the first couple of weeks in November. Now I believe with feeder cattle being two to three weeks behind, this weight loss may cause supplies to be tight into the third or possibly fourth week of the month.
Monday found feedlots at a standstill. They spent the day as well as much of Tuesday digging out and inventorying stock. What little cash cattle trade done Tuesday, was done at $69.00. However after feedlots in the plains had taken stock of the situation, offers were raised to $70.00. Packers who were short on supplies, found themselves paying up to meet their demand.
By the close of trading Wednesday, Amarillo, Texas had reported 58,209 cattle moved at $70.00! Week to date 71,775 had been sold. Dodge City, Kansas reported 24.500 sold at $70.00. Week to date 33,600. Omaha NE reported 27,900 sold at $69.00 to $70.00. Not bad for starting the week buried under a couple feet of snow!
However, weaker boxed beef values coupled with a falling stock market, an unsubstantiated rumor involving E. coli, as well as talk that the cash may be topping out soon, dashed any hopes the bulls had of seeing higher cattle prices. The USDA reported Wednesday that 298 fabricated loads of boxed beef were sold at down $.50 and down $.34 at $105.95 and $105.19 for choice. Select was sold at down $.59 and down $.20 at $95.91 and $95.54.
The December live cattle became the front month live cattle contract Friday. As December is at a considerable discount to the cash market, many traders believe a top in the cash market may be in sight. With traders talking of weaker cash next week, it looks to me like they are trying to price in a $68.00 cash trade to the December live cattle. Today, following the sell off in the stock indexes December live cattle put in a low of $66.70.
RECOMMENDATIONS–1.) I am still recommending the December live cattle. If the cash cattle can maintain the amount of demand currently in the market and supplies are as short-term tight as people have been saying, I believe December live cattle may challenge the $69.00 area. I am recommending going long near the $66.25 level. Place a stop under the support at $65.40.
2.) You may be interested in the spread I am still recommending and have been for the last four weeks. In live cattle futures the spread widened between December live cattle and April live cattle to a level that looked too good to pass up. Closing on Oct. 14th at $6.67! As I recall, the widest range for this spread this decade was around $4.50..taking place in 1993. Since then the spread has narrowed to a level of $4.75. I still recommend buying December live cattle and selling April live cattle. However, I recommend putting it on at a level near $5.50 and would not risk more than $1.50.
Les Jones
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