wmeubank@ocp.kcmo.com
BARNES BROKERAGE CO., INC.
30 S. Wacker, Chicago, Illinois
(October 8, 1997) LIVE CATTLE: “VIEW FROM THE PIT”–For the past 3 year's I have repeatedly indicated that the effect of captive cattle supplies becomes much more severe during periods of abundant cattle numbers. We have just gone through another period again demonstrating “packer power” and it is certainly no coincidence that it comes during a time when the feedlots are showing a 19% increase in finished cattle numbers. We finished last week with adequate enough volume in all areas to leave feedlots in a “current” status although the live price of $66.00 was again a disappointment to most producers. Bargaining power was again severely weakened by the fact that as of October 1 all contract and formula cattle could be called upon. We began this week in almost the exact same status as last week with the packers bidding $64.00 to $65.00 while producers asked $67.00 to $68.00. As is usual during this type of situation, most realists expected the trade to eventually develop later in the week at $65.00 or $66.00. Packers began the week close bought while feedlots appeared to be current and at the beginning of the week it appeared likely that we would see the trade develop at $66.00 by mid-week. Not surprising however, we again saw the same old winner as certain Texas feedlots conceded cattle at $65.00 early Tuesday morning. This news spread quickly across the trading floor and by mid-morning we saw October and December futures down over 100 points. As usual this increased the cattle trade in the country and by noon we saw most packers with their boats loaded and again backing away to $64.00 bids. In an effort at being completely fair, let me also mention at this time that throughout this period there continued to be various news items about E-coli problems that continue to plague the markets. As of this writing (Wednesday PM) we see the entire trade for the week done at $65.00, leaving packers adequately bought into next week and showlists for this week totally sold out.
I expect us to begin next week with feedlots current and asking $57.00 while packers have their needs covered through mid-week and will be bidding $64,00. As was the case this week, I expect the trade to finally develop at either $65.00 or $66.00 but I must admit that with the producers dismal record, at the moment my bet would be on $65.00. Boxed beef prices did little this week as we see today's price on lightweight choice boxes at $102.74 which is $.08 under the price of one week ago. The encouraging factor here though is that for the first 3 days of this week we see the box beef volume very heavy at 1,058 loads of boxes and trimmings. Correlating with the heavy box movement at this time is the increase in federally inspected cattle slaughter. For the first 3 days of this week we see the daily slaughter at 394,000 head compared to 377,000 head last week and 361,000 head last year. These numbers indicate good beef demand and aggressive cattle marketings. During this period of abundant cattle supplies, these are the most important factors in the cattle market, and remain the main focus of my bullish opinion on the upcoming cattle market.
On October 17 we will see the October 1 seven-state Cattle on Feed report and while I expect it to show an increase of about 15% total cattle on feed, bear in mind that this would be 4% less than the September 1 number. I expect September placements to be 1% to 2% over last year. Most important will be the September marketing number which I expect to show about a 16% increase over last year. The number will be a reflection of the increased beef demand and as the beef supply rapidly decreases over the next several months, we should see it result in a substantial increase in cattle and beef prices to the retailers.
My main problem in this entire scenario is the cattle producers repeated inability to capitalize on the situation when everything is in his favor. Per the July 1, 1997 USDA Inventory report, we begin 1998 with about 1½ million less cattle to feed than last year. This should cause sharply higher prices but I must confess to being constantly amazed at how a major portion of our industry simply gives this advantage away by locking in a contract or formula deal that brings them a few dollars over their neighbor. It is the job of our state and national organizations to become active against this practice instead of endorsing it. If packers had to pay higher prices for cattle they would then force retailers to reduce some of their current exorbitant profits. For example: Per last week's Bridge News survey of 15 cuts of beef, the average price was $2.66 per pound compared with $2.41 last year, about a 6% increase. Last week's live cattle price of $66.00 was about $84.00 per head under the $73.00 price of last year (about a 10% decrease).
Hopefully, the E-coli talk will either disappear, become solved, or the public will become jaded. Aside from this I remain bullish the October, December, and February futures. Each of these futures contracts retraced yesterday to the lowest prices of the past 9 months trading at $65.52, $65.46, and $68.40 respectively. I am continuing to buy any severe breaks in any/all of these futures contracts, Beef demand remains strong, exports are good and I believe they will get significantly better. I expect to continue to see heavy marketings and a substantial reduction in feedlot placements over the next year. Packers see this shortage coming now and will continue to do whatever they can to not have to compete. If the industry does not sell out cheaply, I believe we will see the cattle market get $6.00 to $8.00 higher in the next 6 months.
We are currently long October, December, and February cattle and short June as our main spread positions. All of these spreads gave us exceptional entry opportunities yesterday as October-June and December-June both traded into —350 before closing today at —267 and —277. The February-June offered great opportunity as it traded in to —50 yesterday before closing today at —2. I believe that all of these spreads offer the opportunity to make 250 to 500 points per spread ($1,000 to $2,000), near term, on a $350.00 per spread margin.
Volatility in the market creates trading and entry opportunity. Futures anticipate near-term changes in beef and live cattle prices. Stay in contact to know what we are doing now. Stay current. Keep selling cash cattle on the open market.
Les Messinger
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