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IRA EPSTEIN & COMPANY
223 West Jackson, 7th Floor, Chicago, Illinois
(October 8, 1997) CATTLE: LIVE CATTLE/FEEDER CATTLE–Last week live cattle futures broke hard, in part, because of increasing concern over E-Coli events. Since that time this market has been starved for fresh news.
With October live cattle futures going off the board on October 24th and traders poised to move their activity to December live cattle futures, these contracts have maintained a relatively close spread, which is common in my experience. This week traders also had to deal with a cash market that traded at a steady level. With bids at $65.00 and offers at $66.00 cattle soon started to move on Tuesday. As late as today, Amarillo, Texas has reported 100,000 cattle sold week to date at mostly $65.00. Dodge City, Kansas has reported 73,000 sold week to date at mostly $65.00 and Omaha, Nebraska reported 74,000 at mostly $65.00. This should clean up most showlists.
Cash markets are offering some support, however product markets have helped put the kabash on any rallies we've seen so far this week. The USDA reported that Wednesday 383 loads of fabricated boxed beef sold at down $.62 and down $.95 at $102.74 and $101.65 for choice, down $1.18 and down $1.06 at $92.80 and $92.08 for select. In my opinion, weaker products, rising slaughter numbers, as well as, plenty of meat supplies including competition from pork and chicken may plague the market during coming months.
Livestock markets are extremely oversold. In fact stochastics on the chart are at 12% for percent D and 11% for percent K. With stochastics crossing and pointed up we may be in store for a bounce upward. Showlists have cleaned up and heavy sales may place packers in a situation to find themselves short bought. Additionally you have to consider the current corn rally, China's decision to put a hold on corn exports and fund buying of these feed grains.
After Friday's USDA Crop Production, Supply/Demand report I would not be surprised to see grains ease from their overbought condition and allow cattle to head north.
RECOMMENDATIONS–While I believe demand will remain good for U.S. beef, I also believe that December live cattle futures do not have much further to drop. I usually do not recommend taking a long position in a market that has yet to put in a bottom. However, this down trend in live cattle futures has widened the spread between December live cattle and April live cattle to a level that looks too good for me to pass up. Closing today at $5.83 and widening to level of $6.25 last week! As I recall, the widest range for this spread this decade was around $4.50...in 1993. I recommend buying December live cattle and selling April live cattle. I would not risk more than $1.50.
For longer-term traders: According to Moore Research of Eugene, OR, if you had bought December live cattle and sold June live cattle on October 5th, give or take a day, and held them until November 15th, 14 out of 15 years you would have had a profitable trade. However, this does not mean it will work this year. Nothing works forever.
Les Jones
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