US cattle futures surge two-week high amid tight supplies

US cattle futures surged to the highest levels in more than two weeks after a government report reinforced bullish traders' case that beef supplies remain tight.

Beef producers sent 2.022 million heads of cattle into feedlots in May, up 23.4% from the same month in 2009, the USDA said in its monthly report on Friday (June 18).

May placements posted the second-largest monthly percentage increase on record. Still, the report's key figures came out close to trader expectations, signalling that slaughter-ready cattle inventories near the end of 2010 would not be overwhelmingly high. Furthermore, analysts see few signs of broader expansion in the beef industry.

On the CME Group trading floor, the report reinforced sentiment cattle futures have established a near-term bottom after sinking to four-month lows earlier in June. Last week, August live cattle futures rose 1.15 cents to 89.35 cents a pound. On June 11, August futures fell as low as 87.2 cents, the contract's lowest price since mid-February.

Feedlot operators are fattening more animals for slaughter after a rally in cattle prices restored profits following more than two years of losses. May marked the third consecutive month feedlot placements rose over year-earlier levels.

Additionally, US cattle on feed inventories totalled 10.49 million heads as of June 1, up 0.8% from the same date a year earlier, the USDA said. That marked the first time since November that on-feed inventories surpassed the year-earlier total. But cow slaughter remains high, analysts said, suggesting that retention of breeding animals has not yet increased.

While the recent increase in placements implies greater beef supplies later in the year, for the moment, slaughter-ready cattle supplies remain tight. The implied inventory of cattle on feed more than 120 days is currently 3.315 million head, 10% lower than a year ago, analysts said.

The calf crop this year, they added, is expected to be the smallest in more than 50 years. Despite earlier futures rally, analysts still see cash cattle prices continuing lower over the next few months amid signs of eroding beef demand. Wholesale boxed beef prices, an indicator of retail buyers' demand, have dropped about 10% since mid-May.