CASH STEADY
AS FUTURES COLLAPSE
Prepared by Hales Cattle Letter
Nearby Basis Finally In Line
Late this week, rumors begin to circulate about heavy deliveries against the October contract because the nearby basis is out of line. Maybe there will be heavy deliveries but there must be other reasons for the deliveries than a skewed basis. Why? The nearby basis isn't out of line any longer.
After this week's price action in the cash cattle and futures markets, the nearby basis is in line. Today's top chart illustrates this point. It shows the nearby basis for this week since 1987 along with the three-year, five-year and 10-year averages.
Even the second contract basis, December (not shown), is in line with previous history. The February contract remains outside of history. It must weaken substantially or cash must strengthen for the February to line up with history during the next 30 days. Normally by the time October futures expire, the February contract is discount to fed steer prices.
Placements Remain Heavy
After the record setting pace of August placements, many analysts thought September and October placements would fall below year ago levels. That doesn't appear to have happened. Feedlots replaced every head sold in September. Placements in September should be well above last year once again. As a result, feedlots from Texas through Nebraska are jam packed and face at least two more weeks of heavy shipments off grass. Pressure to sell cattle aggressively for pen space will continue through most of October. Fed steers go to $62?
Beef Production Stays Up
Today's second chart shows beef production for the last half of 1996 compared to 1995 and the last half of this year compared to 1996. During the last six months of 1996, beef production averaged 19.3 million pounds per week below 1995. Since the first of July this year, beef production has averaged 16.8 million above last year. Beef production should stay above 1996 in the fourth quarter.
Inspectors Plague Packers
USDA inspectors have forced packers to slow chain speeds and even close plants recently as they search for E-coli contamination. When cattle become wet and muddy this winter, packer problems will escalate. Won't this help build a backlog of fed cattle?
October 3, 1997David Hales and Tom Horton
Hales Cattle Letter
P.O. Box 1623, Amarillo, Texas
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