Livestock review: Cattle surge hits limit on USDA supply report

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U.S. cattle futures surged Monday on government data showing a tightening supply chain for beef as ranchers begin to run low on animals.

Live cattle for December and February delivery quickly jumped during the session by 3 cents a pound, the largest allowed one-day gain at the Chicago Mercantile Exchange. The December contract closed up 2.6% at $1.1972 a pound. October futures, which expire soonest, rose 2.9 cents, or 2.5%, to $1.1972 a pound.

The U.S. Department of Agriculture said Friday after trading closed that ranchers placed 1% fewer young cattle in feedlots in August compared with a year earlier, a signal many ranchers have fewer animals to sell. Those who still have cattle on hand likely are holding on to them in expectation of rising prices, analysts said.

"We knew it was coming," said Tyler Keeling, at Amarillo Brokerage. But "it showed up faster than anybody thought." A mix of severe drought conditions and lucrative prices for beef enticed livestock managers to move record levels of animals through the supply chain.

Keeling said short sellers, or those speculating that prices would soon fall, couldn't cover their positions fast enough. Prices for some contracts rather quickly hit the one-day trading limit as short sellers outbid each other.

Young cattle, or feeders, are the start of the beef production process. They're raised in pastures before being sold, or placed, into feedlots to be fattened further before slaughter.

"The effects of a smaller calf crop are starting to show up," analysts wrote in the CME Group's daily livestock report.

The government report shows a months-long surge in placements tied to a combination of drought and historically high prices for beef is likely approaching an end. Placements have surged this spring and summer as one of the worst droughts in the history of the southern Plains drove ranchers to liquidate their herds as pastures dried up and water supplies dwindled. The drought stretches from Texas to Kansas. Ranchers also have been selling to take advantage of feeder cattle prices, which reached record highs this summer.

Still, the decline in the number of cattle sold to feedlots surprised traders and analysts. Many had expected another rise in August after July placements set an all-time record. Yet ranchers are seen facing dwindling supplies and conditions in more-northern states like Nebraska are much better, likely giving owners there the flexibility to hold on to animals.

The declining number of animals being sold to feedlots is expected to translate into higher prices for beef. That's because the number of animals coming out of feedlots for slaughter eventually will decline, tightening supplies. The U.S. government boosted its 2011 price forecast for beef on Friday, raising its projection to an increase of 8% to 9% from 7% to 8%. It is projecting an increase of an additional 4.5% to 5.5% in 2012.

Analysts warn it will take time for cattle supplies to rebound, particularly since ranchers have liquidated a large number of heifers instead of breeding them.

In the cash cattle markets, trading was quiet throughout the Plains and Midwest on Monday as processors are reported to have enough animals purchased for this week's slaughter operations.

Trading was generally active last week although split between early-week trading in Texas, western Oklahoma and Kansas and late-week sales in Nebraska.

In Texas, Oklahoma and Kansas, live sales last week were mostly at $1.16 a pound, down generally 1 cent a pound from a week earlier.

Feedyards in Nebraska traded cattle mainly on Thursday from $1.15 to $1.16 a pound live and from $1.82 to $1.84 a pound dressed. Prices there were down mostly 1 cent a pound from sales the previous week as well.

The USDA reported choice boxed beef prices at midday Monday up $1.22 at $184.53 per hundred pounds and select beef up 80 cents to $169.74 per hundred pounds on 99 total loads.

The latest HedgersEdge packer margin index was minus $16.50 a head, compared with minus $10 the previous trading day. This is an estimate of packer returns on cattle slaughtered and processed expressed in the form of an index.


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