July 16, 2010

US cattle prices rise on third day

"Packers bought cattle earlier in the week than expected because they ran short on supplies," a veteran CME cattle trader said. "In doing so, though, it took a toll on their margins heading into next week's cash trade."

Operating margin index for beef packers for Wednesday (July 14) was plus US$16.30 per head, compared with plus US$23.15 Tuesday (July 13), which put packer margins a week ago Wednesday (July 14) at US$46.95.

Those in CME's live cattle pit look to the financial markets as an indicator of consumer demand for various expensive household goods, including high-end beef cuts. Cattle traders later turned away from outside market forces and focused on this week's futures/cash relationship. Gains in the August and October contracts triggered buy orders, and eventually both contracts rose above Wednesday's two-month high.

Meanwhile, the weaker dollar and the climb in CBOT corn motivated far-month cattle buyers. A cheaper dollar tends to improve US exports overall. High-priced corn is supportive for cash cattle prices in the future, because cattlemen may put off herd expansion plans if faced with expensive feed costs.

Floor-traded CME feeder cattle ended weaker because of expensive CBOT corn that could boost cattle feeders' input costs. August and September also triggered sell orders when both months retreated below their respective 10-day moving average support areas. Lean hogs stumbled after wholesale pork prices on Wednesday (July 14) pulled back for a second consecutive day and packers kept the pressure on cash hog values Thursday.

"Futures rallied Wednesday because of technical reasons, but the fundamental outlook appears less than rosy," said R.J. O'Brien hog trader Tom Cawthorne.

Traders sold August and bought October on spreads that some also linked to residual "roll" transactions. Spreads involve trading two or more months at the same time while capitalizing on the price differences between them.