The Hightower Report

Below is an excerpt from The Hightower Report’s most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

The cattle market’s supply fundamentals continue to tighten, and traders see the smallest increase in production from the first quarter to the second quarter in the past 12 years for 2012. This could lead prices sharply higher into the spring “if” there is not too much consumer resistance. Per capita supply this year is expected to be down 5% from last year. The USDA January Inventory Report was not a big surprise, but it did confirm the smallest inventory in 60 years. The report looked slightly supportive, as the beef herd was a little below expectations. In addition, the number of heifers weighing 500 pounds and over came in at 101% of last year. Traders were looking for 98.5%. This means fewer females available for feedlot placements into the spring, and that could help support the deferred contacts. If there is a shift to begin to expand the US herd, the near-term supply of cattle will tighten further, as there will be fewer heifers available to move to feedlots.

In order to see an expansionary move by the industry, however, it will be important to see an easing of the drought conditions in Texas and Oklahoma in the months just ahead. As of this writing, the extended forecast models were predicting relief from the drought. Traders will need to monitor this situation into the spring. Also in the Inventory Report, feeder cattle supply outside of feedlots came in down 4% from last year. Total cattle and calves as of January 1st came in at 90.769 million head, which was 97.9% of last year. The calf crop was 35.313 million head, 98.9% of last year. Nearby feeder cattle futures hit all-time highs on February 1st.

Poor packer margins and talk of weaker demand from packers for live inventory as they cut back on slaughter has kept the short-term cash fundamental news sloppy. Tightening supply is seen as a positive force for cash markets, but beef prices have lagged, and this has driven packer margins deep into the red.

The long period of very negative profit margins for packers and sluggish beef prices, even with a slowdown in the slaughter pace, were factors that helped spark negative price action into February 6th. With the market’s overbought technical condition, there could be follow-through selling, but with a more positive tilt to the outside market forces, an expanding US economy, improving employment data and expectations for a tightening cattle supply, the cattle market may continue to attract buying interest from fund traders. The Commitments of Traders reports as of January 31st showed non-commercial traders buying were net long 85,643 contracts, an increase of 7,221 for the week. This buying trend is a short-term plus. In the past, non-commercial traders have held a net long of as high as 144,200 contracts.

Beef demand tends to be its strongest in the spring, and beef production typically increases by 250-300 million pounds from the first quarter to the second quarter. The USDA shows an increase of just 135 million between the first and second quarters this year, the smallest of the last 12 years. If the cattle expansion phase kicks in, production could be even lower. Exports are becoming more important to the market, and demand looks favorable ahead. If beef prices turn higher over the near term, the market will be in a position to attract further buying support from fund traders. Look for an eventual test of the 140 level into the late spring.

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