May 24, 2004

US Cattle Data Seen "Neutral To A Shade Friendly"

Initial floor trader and analyst reaction to Friday's U.S. Department of Agriculture monthly cattle-on-feed report called the data "neutral to a shade friendly" for Monday morning's Chicago Mercantile Exchange live cattle futures opening prices.
 
Several analysts saw the numbers as confirmation of the bullish outlook, while those focused on the cash market said they would wait for Monday's cattle futures to open before believing the positive price predictions.
 
The total number of cattle on feed as of May 1 was 2% less than a year ago, while analysts had expected a 1% decrease.
 
The April placement category came in at 86% of a year ago, compared with the average analyst estimate of 87.9%.
 
That means April was the fourth consecutive month in which feedlots placed fewer cattle into feeding pens, compared with a year earlier, according to USDA data.
 
At 95%, the average April marketings prediction was slightly above the average 94.5% pre-report estimate.
 
"The data looks supportive across-the-board," said Dan Vaught, analyst with A.G. Edwards & Sons in St. Louis. "The placement figure confirms the industry is not being aggressive in placing cattle, despite the high cash prices the end of April."
 
Vaught said marketings figure indicates the industry is still moving cattle at a steady pace with the data reminding him of the last quarter of 2003, when beef packers trimmed their beef production by killing fewer cattle to regain their leverage on wholesale beef prices.
 
Vaught also pointed to the decline in the weights of most feeder cattle being placed into the nation's feedlots, with only the less-than-600-pound category showing an increase.
 
"The weight breakdown shows we're running out of yearling cattle in this country," said Chuck Levitt of Alaron Trading in Chicago. "I have to check to make sure, but it looks like the lowest supply in 15 to 20 years."
 
Levitt also said May placements this year have been far less than a year ago, which was a "huge" period for placements. "That means we're guaranteed May will be the fifth consecutive month of lower year-over-year placements."
 
As a result, Levitt projected a 25-point gain for Jun, a 25- to 35-point jump for Aug, and a 50- to 100-point boost for the Oct through Feb live cattle contracts Monday morning.
 
"This report is not neutral," Levitt asserted. "The on-feed number is less than most analysts expected. The May 1 on feed figure is lower. Marketings were positive."
 
Levitt said the report even ameliorated what might have been an ominous front-end supply figure for the summer months. However, Levitt still sees "adequate" summer supplies sufficient for demand purposes during the warmer weather.
 
However, Bob Wilson, of HedgersEdge.com in Colorado, viewed the report as more of a confirmation of analysts' ideas.
 
"The totals on feed showed a nearly normal seasonal decline," Wilson said. "Usually numbers on feed drop from April to May by 354,000 head. This year we dropped 388,000 head, so a little friendly from that aspect. The surprising number was the large "other disappearance" category, but this essentially makes up the difference from the trade expectations for placements and the number reported. The market might look at this report for five minutes Monday, then we will have to deal with cash and product trends to see how the week will shape up."
 
CASH REACTION
 
"There is nothing in this report that affects the cash market directly," said David Hales, market analyst with Hales Cattle Letter.
 
Hales and Richard Nelson, livestock market analyst at Allendale Inc., agreed that if this report were the only influence, cash markets were likely to be steady next week at mostly $86.00 per hundredweight on a live basis and mostly $138.00 dressed.
 
Nelson said cash traders would have to wait and see how the futures market interpreted the USDA report before they could determine how it would affect their bids or offers. Ultimately, though, Nelson thought cash traders would have to go back to trading on tightening fed cattle supplies and seasonal meat demand.
 
Hales said the continued lower placements, especially of the heavier weights, could help build a premium in deferred futures contracts and shift cattle feeder emphasis on quick sales to longer feeding times as they aim for the higher-priced periods.
 
However, such a shift in attitudes would not happen quickly, but a gradual change could begin to tighten near-term supplies as cattle owners fed their animals to target then toward later slaughter dates, Hales said.
 

Source: USDA