June 29, 2004

US Cattle Prices Expected Lower Following BSE News

Lower fed cattle prices were expected in the U.S. following news late Friday, that U.S. Department of Agriculture investigators had come across a positive reaction for bovine spongiform encephalopathy, or mad-cow disease, in the rapid test being used to gauge how badly the country's cattle are infected.
 
However, in general, cash traders are more willing to await definitive test results from the federal laboratory in Ames, Iowa, before making any changes to marketing plans. They are also waiting to hear of any consumer reaction, trade sources said.
 
In December, the last time a cow was discovered on U.S. soil with BSE, the public had little reaction, and beef demand continued without much of a stall. But there is always a question about the latest reaction. The first cow was likely to have contracted the case in Alberta, Canada, before being sold into the U.S. Therefore a purely U.S. cow could present a new range of questions for the U.S. consumer.
 
The futures market, however, is a different story. Most expect this predictive and reactionary market to open sharply lower, and some said limit down would not be out of the question.
 
"My guess is (futures will be) sharply lower simply because we rallied so hard last week," said Daniel Bluntzer, director of research for Frontier Risk Management, in an e-mailed response to questions. "I believe the market was already preparing to move lower, even with $90.00 cattle last week.
 
"Longs will likely want to step aside, and hedgers will probably want to sell a few if they can," Bluntzer said.
 
David Hales, market analyst with Hales Cattle Letter, also responded to e-mailed questions, and said he expected futures prices to be "sharply lower to limit down based on fear of being long in case it (the suspect BSE case) turns out to be positive."
 
Mike Zuzolo, market analyst at Risk Management Commodities, said in an e-mail that he was looking for some reaction from Japanese/U.S. talks in Colorado Monday. So far, they are expected to go ahead as planned, which could be supportive to futures after the open.
 
"As long as there is no breakdown...I would anticipate the live cattle market to be cautiously optimistic - lower, yes, but not lock(ed) limit down," Zuzolo said.
 
Mike Leheska, market analyst with Amarillo Brokerage, said his office had done some calculations that showed the U.S. should come up with a false positive about every 24 days. This was based on the published rate of false positives and the rate of testing the U.S. is doing on the older cattle.
 
If the Amarillo Brokerage estimates are correct, this result would be right on schedule, Leheska said.
 
The main thing to watch will be how the consumer reacts to the news, Bluntzer said. He did not expect it to "shake them," so he saw it more as "a bump in the road that could take 30 to 60 days to work through."
 
Cattle that were born before a ban on feeding ruminant-derived feed products to cattle would be more suspect, market analysts said. These cattle would be old enough to have consumed these products. Questions have lingered about full-scale compliance with the feed ban, whether by accident or on purpose, and a BSE case in an animal born after 1997 could suggest there were holes in the ban.