Market Update by Derrel White

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MARKET UPDATE (from Derrel White, CFO, Brookover Feed Yards, Inc.):

Everyone in the cattle business was looking for good news last week. On Thursday we had very good beef movement on lower to mixed prices. Friday had good movement on higher prices. With Thanksgiving featuring coming to an end and buyers looking towards Christmas/New Years beef featuring. The futures markets staged a nice rally off the contract lows set on Monday although trend reversal signals have not been confirmed yet. Few of us expected a rather bearish Cattle on Feed report to come after the close on Friday. To add even more confusion to the mix, packers in the north were caught extremely short bought after the close and were forced to pay higher money to get their needs covered for the short kill week of Thanksgiving. These mixed signals leave everyone wondering where the market is going from here.

To break this market down we need to look at several aspects including some of the numbers that are included in the latest USDA report. There was little question that the futures market were extremely oversold and due for a technical bounce last week. The rate and depth of the rebound was impressive as a new round of buyers stepped in each time the market tried to retreat. Unfortunately, we left gaps on many of the contracts on Thursday and the bears will probably try to fill those at some point before a long term bull trend can continue. Currently, we are very overbought on the feeder contracts and the fat contracts are not that far behind. Over the last year, the markets have generally gave in to an overbought scenario sooner rather than later. This combined with some expected position evening before the holiday this week would suggest that we might sell this market off temporarily before reestablishing a longer term bull trend.

The Cattle on Feed report was a major surprise in the placement numbers as most analysts were expecting at least a 5-7% lower placement figure for October vs. last year. The report came in at 97% and was considered bearish for feeders and the 1st quarter finished cattle. The marketings came in at 99% which was right on the industry guesses and total cattle on feed were at 100% vs. last year which was only 1% higher than expected. Most analysts were quick to term this report very bearish and call the feeder and February and April fat contracts lower for Monday. Traders however seemed to be willing to look past this report and point to higher cash prices expected as support for nearby and longer term contracts. In evaluating the numbers in the USDA report, I can find some good news buried in the bearishness. If in fact the total on feed number is correct at 100% including the higher than expected placements then our front end supply situation is maybe not as bad as we had anticipated. Carcass weights continue to stay in record areas and that is a cause for concern but the industry has made progress on getting rid of the really big animals over the last three weeks.

We also have no weather premium in this market yet for spring cattle. It is not a matter of if but when we will get some weather. This gives me hesitation in hedging cattle for January through April of next year at these levels. However, it is unlikely that we can maintain the progression of this latest rally and I am currently inclined to sell the overbought market at higher levels and take a look at lifting those hedges on sell offs. When we get a weather rally and producers can lock in profits on cattle currently on feed it makes sense to have protection until the demand picture vis-à-vis post September 11 is clearer. If you have any questions or comments, please email me at <A HREF="mailto:[email protected]">[email protected]</A>.


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