ANALYSIS - Buying breaks in the live cattle futures market has been our recent strategy and approach to the beef complex, writes Dennis Smith of Archer Financial Services.
We "first" became bullish toward feeder cattle futures and began building bullish positions in this market. My concerns were focused on the strong possibility of escalating replacement costs for my customers who are constantly purchasing feeders for placement. Secondly, recently, I reached the conclusion that the cash steer market had likely formed a bottom and finally, it became apparent that wholesale beef was bottoming out. Thus, the table is set for an uptrend in live cattle futures. I'm speculating that this uptrend is sustainable and will continue for weeks, if not months.
Adding fuel to the concept of bottoming action in the live cattle market was the surprise announcement recently by Tyson Foods that effective September 6th they will no longer purchase cattle for slaughter that had been fed the feed additive Zilmax.
This surprise announcement sent cattle futures limit up, although much of the gains were quickly lost in the sessions that followed. Still, the announcement by Tyson Foods, a very well-managed company that processes about 25% of the beef in the U.S., can't be ignored by the trade.
Their reasons for the decision were stated as animal welfare in nature. While this may certainly be part of the story, I contend that Tyson is in the process of negotiating some serious beef export contracts, most likely with China. It's a fact that beef demand in China is surging, perhaps even more than pork demand, as large scale urbanization occurs. It is estimated that over the next twenty years over 250 million Chinese will move to large cities.
Returning back to the beef fundamentals, it pays to not forget that we're dealing with the smallest calf crop in sixty years. In addition, the transition from record high corn prices to much cheaper corn prices has created some distortions in the cattle industry that will play out as bullish factors in the months ahead. For example, the record high corn prices this spring created a desire by the industry to place heavy weight yearling type cattle for a quick turn-around in an effort to lose less money and set the table for the possibility of making money when cheaper corn became available.
The data is undisputable. Placements of heavy weight, yearling type cattle from March through June were record large. This will cause, or force average placement weights to decline in the months ahead. In addition, total placements will likely decline in the months ahead. The one-two punch will create a very tight fed cattle supply about six to eight months from now.
When you consider the new uptrend that's developed in the live cattle futures market and take into consideration the concept that something big is happening at the packer level, in tandem with sound evidence of a bottom in the cash steer market and a bottom in the wholesale beef market, it's fairly easy to "get bullish." That's where I'm at....I'm bullish live cattle futures and trading accordingly.
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