CHICAGO (Dow Jones)--Chicago Mercantile Exchange cattle futures are firmly focused on the price of corn instead of traditional fundamental factors such as cash live cattle prices or wholesale beef values because more expensive corn raises the cost of feeding cattle, traders and analysts said. "You have to take rising corn prices seriously," said Phil Stanley, floor-based analyst and broker. "The cattle futures market is certainly taking it seriously."
On Thursday, Chicago Board of Trade corn futures soared primarily on concerns about the size of the U.S. crop. December corn futures settled up 11 1/4 cents to $3.44 3/4 per bushel, but the contract got as high as $3.53 1/2. Several traders and analysts said they wondered when cattle owners would begin bringing supplies more rapidly to market because of higher corn prices.
"I expect we will soon see the effects of higher feed costs," said Dan Vaught of AG Edwards and Sons. "We are going to see cattle producers move those animals to market pretty quickly." Thus far, feeder cattle futures have seen the biggest declines in reaction to higher corn prices.
However, selling in feeder futures also appears to be spilling over into live cattle, especially the December live cattle contract because cattle owners could hurry supplies to market. On Thursday, December live cattle registered its lowest close since June 14, for a 4 1/2-month-low close. December live cattle closed at 86.75 cents a pound, down 80 points. January feeder futures closed down their daily allowable limit price floor of 300 points at 98.42 cents.
"December doesn't have a lot going for it right now," said one of the younger cattle-pit locals during Thursday's session. "The roll of December longs into February begins next Tuesday, and December isn't going to look too good after it closes below its 200-day moving average at the final bell." After Thursday's close, December's 200-day moving average was 87.35 cents.
Many traders expect the December contract to lose more ground, with many floor brokers favoring the short December and long February spread. "It's still the corn and the bear spreads will continue to work," said James Brooks of RJ O'Brien. June through October live cattle futures closed higher Thursday amid expectations higher corn prices would reduce the number of cattle placed into feedlots.
"There were going to be fewer November placements anyway, but now there will be even less," said a prominent floor broker, with one of the nation's largest cattle operations on his books. Several traders mentioned there have been times of high corn prices when slaughter-ready live cattle prices have been higher than feeder cattle quotes.
Vaught pointed to the summer of 1996 as a period where fattened cattle prices were more expensive than feeders due to $5 per bushel corn. But, much depends on corn and $5 corn price levels have not yet been reached. Several analysts and traders questioned near-term demand from ethanol plants for corn supplies.
"I think corn might be getting ahead of itself a little bit, said Vaught. "New ethanol plants aren't built overnight."
-By Jim Cote, Dow Jones Newswires; 312-715-6284; jim.cote@dowjones.com