U.S. cattle: Futures up after USDA report shows smaller supplies

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CHICAGO (Dow Jones)--U.S. live cattle futures rallied Monday after a government report showed lower-than-expected supplies in early stages of the U.S. beef production pipeline.

Cattle for October delivery rose 1.625 cent, or 1.5%, to $1.1845 a pound in trading at the Chicago Mercantile Exchange. The CME December contract rose by its three cent daily limit, or 2.6%, to $1.19725 a pound. September feeder cattle futures were higher by 0.725 cent, or 0.6%, to $1.3285 a pound.

The U.S. Department of Agriculture said Friday after trading that cattle producers had added 1% fewer young animals to feedlots in August, as compared to last year. Young cattle, which are known as feeders, are fattened in feedlots before being sent to slaughter.

The smaller-than-expected placements were far lower than analysts' average forecast for a 7.7% increase in placements. Industry economists and investors had expected another surge of monthly placements as ranchers in the South, beset by a historically severe drought, have hurried young animals off barren, uninhabitable pasture lands.

In northern states, where pastures are better, owners appear to be holding onto cattle with expectations they could be worth more in future months. Because of a knock-on effect of the drought, there will be fewer cattle to send to feedlots in 2012, tightening supplies and supporting higher prices. The softer prices of grain in recent weeks, too, has made it more affordable retain animals.

"This data suggests that where grass is still available, producers are likely keeping them there as long as possible," said Elaine Johnson, analyst at CattleHedging.com. "It is possible, then, that we could still see a jump in northern placements in September [or] October."

The cattle complex was supported Monday by broad stability in world stock and commodity markets after they tumbled sharply in the previous week on concerns about the fragile state of economies in the U.S. and Europe. The Dow Jones Industrial Average was recently up 130 points, at 10902. Crude oil was recently essentially flat at $79.81 a barrel.

The lower-than-expected placements provide fundamental support to a cattle complex that has weakened recently as supplies have outstripped demand. Meat packer margins have recently dipped into negative territory after costs for animals in recent weeks rose more quickly than wholesale beef prices, which were down again on Friday.

The U.S. Department of Agriculture reported choice beef prices on Friday down $1.15 a hundred pounds, at $183.31. Select was off $1.18, at $168.94, the lowest since June 17. Beef sales on the day were reported at 189 total loads.

The latest HedgersEdge packer margin index was minus $16.50 a head, compared with minus $10.00 the previous day. This is an estimate of packer returns on cattle slaughtered and processed expressed in the form of an index.

The cash cattle markets are expected to be quiet throughout the day Monday as processors have ample supplies for this week after buying larger numbers of animals last week.

No bids are expected until late Tuesday or Wednesday and trading may not get underway until Thursday or Friday.

Last week's sales were split between a rare Monday trade and Thursday's sales. Prices last week in Texas, Oklahoma and Kansas were at mostly $1.16 a pound on a live basis, down generally one cent a pound from the previous week. In Nebraska, most of the week's sales occurred on Thursday and ranged from $1.82 to $1.84 per pound dressed and $1.15 to $1.16 live.

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