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Chicago - Weary of watching Chicago Mercantile Exchange cattle futures charts, more traders and
market analysts are focusing on ideas beef exports will recover, while bears see a sea of cattle pouring out
of feedlots this summer, resulting in futures price volatility.
Since late summer, steady beef demand and limited slaughter-ready live cattle supplies have caused beef
packers to compete for fattened animals, which firmed cattle values.
And important U.S. beef importers such as Japan and Korea are again, at least partially, accepting U.S.
beef as import bans are being eased. South Korea said Friday it will reopen its borders to some cuts of U.S.
beef in March.
Most importing countries banned U.S. products after the December 2003 discovery of one cow in the
U.S. with bovine spongiform encephalopathy, or mad-cow disease.
But some traders and analysts say exports had better not disappoint, because summer supplies are set to
increase.
"Feedlots are chock full of cattle," said a cattle pit broker from Texas who said he holds large long live
cattle put option positions. "We had record placements (of cattle into feeding pens) in November,
December and, so far, in January. Starting in May, it will be interesting to see what prices beef packers will
pay; when supplies are so plentiful that weekly slaughter will have to climb from the current 550,000 to
600,000 head to more than 700,000."
According to the bearish scenario, cattle prices, both futures and cash, have already seen their highs for
2006. Historically low feedgrain values are encouraging cattle feeding and many analysts expect a tsunami
of fattened steers and heifers to begin appearing in about three months.
Corn futures prices at the Chicago Board of Trade are hovering around $2 a bushel after the U.S.
Department of Agriculture confirmed the second-biggest U.S. crop ever was harvested last fall.
Also, traders and analysts with short positions say bird flu fears in Europe and elsewhere will hinder
poultry exports, thus increasing competing domestic meat supplies.
Just recently top chicken exporters Tyson Inc. (TSN) and Pilgrim's Pride (PPC) said a weak chicken
export markets are hurting earnings. These bearish analysts are also pointing to declining pork prices,
although lean hog futures are indicating higher summer hog values.
However, other traders say pork and beef will benefit if consumers shy away from poultry. Also, they
say futures quotes have already "built-in" a 682-point price discount in June, compared with April, in
anticipation of larger summer live cattle supplies.
"Of course, we don't know how the bird flu situation will turn out," said Dan Vaught, an economist with
AG Edwards and Sons. "But, I see no strong reasons we won't see a three to four dollar (per
hundredweight) seasonal cattle rally in the first quarter."
On the demand side of the cattle price equation, traders and analysts say they will be watching for
indications U.S. beef exports to Japan and South Korea are recovering.
As expected, early exports to Japan have been light. A news report said Friday that Japan imports in the
first month after the ban was partially lifted were less than 4% of the normal amount before the import ban.
"On the downside, the big supply concern would be if producers lose control of their inventory," Vaught
said. "If the weather remains mild, we may see more cattle show up earlier and the danger of producers not
marketing supplies promptly could back up cattle in late spring and early summer.
Before Wednesday's big drop in livestock futures quotes, an introducing broker in Montana predicted a
January futures price correction, which would shake out weak longs and funds following short-term trends,
before a "push to spring highs in early March."
That correction may have come to fruition in just a couple of hours Wednesday.
But, the Texas bear says his perfect storm is brewing as contented cattle chew on inexpensive corn.
"When the market realizes how big the summer cattle supplies will be, then the funds now holding
73,000 long contracts will try to sell those and go short 73,000," said the Texas bear. "We could see the
biggest six-month price drop ever."
Source: Dow Jones Newswires
E-mail: sflanagan@sprintmail.com |
