wmeubank@ocp.kcmo.com
BARNES BROKERAGE CO., INC.
30 S. Wacker, Chicago, Illinois
(October 15, 1997) LIVE CATTLE: “VIEW FROM THE PIT”–We finished last week with almost all of the state's showlists sold out by mid-week at the disappointing price of $65.00. We began this week with feedlots very current and producers again asking $67.00 while packers were close bought and bidding $65.00. “The beef is the grief,” and most of us in the industry have heard so much about how bad the beef movement is, it almost makes me want to sell my meat packing company stock. It also makes me wonder why our slaughter last week was 697,000 head if packers are losing money. This pressure is reflected in today's boxed beef price as we see box movement moderate with today's price on lightweight choice at $101.80 which is $0.94 under last Wednesday. Nonetheless, I will continue to play the devil's advocate and point out that average retail beef prices are running about 6% over last year while the price they pay for the boxed beef is now $7.38 under last year ($109.18 versus $101.80) or about 7%. This is allowing the retailers an exorbitant profit margin and it remains my opinion that this margin will soon give the beef wholesaler and the packer the leverage they need to increase prices.
I do not deny that at this time the very popular bearish arguments regarding the cattle have substance. Heavy July and August placements have given a substantial increase in total cattle on need. Weights are currently running about 15 pounds per head over last year and I believe they will go higher. Supplies of pork and poultry will be ample and will exert pressure on beef prices. These are all very real factors that will greatly influence the upcoming cattle market, but I believe all of these can/will be off set with aggressive marketings.
(a.) Although placements during July and August were about 11% over last year, it must be noted that placements of cattle weighing over 800 pounds were up over 29% during this period. This means that the bulk of these cattle will be gone by early December and almost all of them will be dead before year end.
(b.) While it is true that Thanksgiving comes during November, we frequently lose sight of the fact that Thanksgiving is only one day, and historically November is normally a very good month for beef demand. I continue to believe that the present huge retail profit margin will provide all of the incentive necessary to keep retailers featuring beef.
(c.) We continue to hear stories about packers losing money on cattle at current price levels. I do not believe this for an instant, and why is it that we never hear talk about the $100.00 per head the packer receives for the hide and offal.
(d.) I believe we will see almost an immediate upturn in beef exports. The E-coli publicity is lessening in Japan and I expect to see an increase in beef exports shortly. South Korea has already announced that they have not found any re- occurrence of E-coli in recent beef shipments. This should cause a resumption in beef shipments to Korea correcting what many of us felt was a purely political move anyway. I expect to see China soon move into the position of becoming a major export customer. We saw a step in the right direction earlier this week when they reduced their import tariff an hides from the U.S. Mexico has now become our second largest beef export customer. The peso appears to have stabilized and Mexico is gearing up for their largest tourist season in history. Most of the beef exports are for the hotel and restaurant trade.
(e.) I believe the increased exports plus the reduction in cow slaughter will offer the increased numbers and weight over the next 60 to 90 days. I also believe that per the USDA Semi Annual Cattle iIventory report, we showed about 1½ million fewer feeder cattle to become finished cattle over the next year. I expect this tightness in numbers to begin to show up in sorry 1998.
Our main problem remains that right now we continue to have a huge segment of our industry that keeps trying to convince us that today in 1997, it is natural to lose $30.00 or $40.00 per head by selling cattle at prices $150.00 per head less than in 1979. Since I believe that the real beginning of captive supply as a weapon began in 1994, I looked back on cash cattle prices during November of 1988 through 1993. During that six year period we see that prices stayed generally between $74.00 and $75.00 with the exception of 1990 when they went to $80.00. Regardless of how anyone tries to convince you differently, the main difference between then and now is that in 1990 the producer received 60% of the total retail beef dollar (per USDA Economic Research Service). In 1997 we are receiving about 44% of the total retail beef dollar. That difference comes to about $250.00 per head or over $20.00 per CWT. Who represents the cattle producer?
I continue to believe that we will soon be getting into better demand and much smaller numbers that will materialize into sharply higher cattle prices in the not too distant future. Futures continue to trade explosively with sharp sudden breaks giving us entry opportunities. October futures traded as low as $66.65 yesterday before closing today at $67.10. December futures traded earlier today at $65.57 before closing today at $66.20. February futures traded earlier today at $68.20 before closing at $68.77. I will continue to add to long positions in any/all of these contracts. I continue to believe that they will eventually trade $2,000.00 per contract (500 points) higher.
Our main spread positions remain long December/short June and long February/short June. The December/June traded at —400 before closing today at —365. The February/June trade at 130 before closing today at —107. I continue to believe that these spreads are offering a great entry opportunity and I am adding to them. I believe the profit potential in these spreads is $1,000.00 to $2,000.00 per spread. Remember, whenever a trade offers profit potential there is also a corresponding potential for loss, volatility creates opportunity. Futures will anticipate changes in wholesale beef and cash live cattle. Stay in contact. Stay current. Keep selling cash cattle on the open market.
Les Messinger
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