November 24, 2003



USDA Report: Both October Cattle Marketings And Placements Surprise


Despite higher-than-expected October placements, most analysts think futures prices will react positively to Friday afternoon's U.S. Department of Agriculture monthly cattle-on-feed report, because feedlots marketed cattle so aggressively amid record high futures and cash prices during October.


Also, because the weight breakdown of the replacement cattle was skewed to the very light weight group, analysts see any negative impact pushed back into the spring and summer months, which already hold deep price discounts.


Some analysts and traders think Dec could open at its daily limit-up price level Monday in reaction to the data. Cash market reaction was much more subdued.


"Although the inventory of cattle-on-feed came in almost exactly as expected, the manner in which we arrived at that point was much different than we anticipated," said Chuck Levitt of Alaron Trading Inc. "Feedlots marketed more than expected and replaced those cattle by loading the boat with lightweight cattle."


"You have to view this as supporting the front futures months," said Travis Benson of Crystal River Capital in Colorado. "The concentration of placement in the, probably, 400- to 600-pound range stretches the impact of these placements out until at least Apr."


Levitt concurred. "Dec could see a 100-point price boost, while Feb is stuck in between Dec's bullishness and Apr's bearishness," Levitt said. "The front-end supply of cattle-on-feed 120 days or longer, is only 74.7% of last year, or more than 25% less."


Dan Vaught, analyst with A.G. Edwards & Sons in St. Louis, along with Benson and several others found it difficult to explain the difference between the marketing figure given the USDA October slaughter data. However, analysts were unanimous in their opinion that the cattle cash and futures markets would be interesting the next few weeks.


"The blistering pace of slaughter pulled a tremendous amount of cattle forward," said Vaught. "No wonder feedlots were being stubborn about pricing this week. With so few cattle ready for market, they can probably afford to be stubborn for another two weeks."


Vaught also focused on the lightweight portion of the placement category breakdown, however, he sees less bearish implications in those numbers. "Given the circumstances, I don't think those lightweight feeders will be a major bearish factor."


Vaught said he thinks CME futures have built in sufficient price discounts to allow for the aggressive placements by feedlots. Also, Vaught believes feedlots will continue to market animals as they become available for slaughter, which will keep numbers current well into next year.




However, the cattle-on-feed report is not expected to generate any excitement in the cash market because there is hardly any way for it to react to higher-than-expected marketings in October, market analysts said.


Cash markets next week are more likely to react to this weekend's snowstorm moving across the northern Plains and the Midwest than to this report, said Steve Shakespeare, president of Guardian Futures.


As for the futures pricing, those quotes already are set up for the higher- than-expected number of cattle placed, Shakespeare said.


Shakespeare cautioned traders about getting too carried away with the placements figure. With so many of them being very young cattle, a large percentage, possibly about 17%, could go back out to wheat pasture and be sent to the feedlots again later.


The report is likely to keep bull spreads in futures markets popular, Shakespeare said, but such spreads are unlikely to change what's going on in cash markets. It won't even encourage feeders to pull cattle forward to sell at an earlier-than-scheduled date. They're already doing this because they don't have any other cattle to sell, he said.


David Kruse, owner and livestock market analyst at Commstock Investments Inc., said the marketings figure would help cash markets by turning market psychology squarely back into the hands of the cattle feeders. He expected asking prices to rise next week, "and if they stick to their guns, they may get it," he said.


The cattle industry has never entered the winter season with a more current marketing position, Kruse said. Packers also don't have the inventory of their own cattle they often have at this time of year.



Source: USDA

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