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Cash cattle seen rallying briefly, then fading

By Lester Aldrich and Theopolis Waters
Of DOW JONES NEWSWIRES

CHICAGO (Dow Jones)--Market watchers are cautiously optimistic about a potential post-Memorial Day Chicago Mercantile Exchange live cattle futures and fed cattle market upswing into mid-June, but they paint a less-than-rosy forecast heading into the summer.

In early-April, fed cattle prices and corresponding CME live cattle contracts peaked at some of their highest levels of the year, ignited by reduced supplies in part because of costly feed, inclement winter and drought conditions last summer. This led to less meat available for retailers and pumped up beef cutouts, the federal government's survey of retail meat cuts.

Slaughter-ready cattle are delivered to fulfill live cattle futures contract obligations at the end of each futures contract month.

Live cattle trading months, cash prices and boxed beef values have tumbled since because of a seasonal bump up in cattle numbers. That lessened processor demand for animals as the three-day Memorial Day holiday neared, clipping fed cattle returns and ultimately undermining futures.

Friday, spot-month CME June live cattle settled at 91.05 cents a pound versus an April 5 close of 96.32 cents. Actively traded August finished at 91.15 cents compared with 94.32 cents on April 5. Fed cattle prices on a live basis last week averaged mostly $94.50 to $95 per hundredweight after reaching $100 during the week of April 5.

Grocer demand for beef cuts also suffered as meat buyers booked product hand-to-mouth as they stocked meat cases before the holiday. The average price for choice boxed beef cuts for the week ending May 25 was $163.78 after topping $166.88 the week after futures and fed cattle peaked.

Nonetheless, a short-term market snapback may be on the horizon due to reduced supplies over the Memorial Day holiday, which the meat industry regards as the official kickoff of grilling season. Furthermore, wholesale beef-buying interest intensifies as consumers choose to prepare meals outdoors.

Obstacles And Hurdles Remain For CME Cattle Rally

A brokerage firm's trader said CME live cattle futures have several hurdles to clear before it can mount a late-May or early-June offensive, one of which is exchange position limits. CME exchange position limits, or "comedown" requirements, specifies that no person can own or control a specified number of long or short contracts in the expiring month. The first comedown date for the nearby June contract is June 4, with the second date a week or so before the June contract expires on June 29.

"Funds are already rolling out of some of their long positions into nearby August to meet the first comedown deadline," the trader said. "That, along with cash unraveling recently, is putting extra pressure on June."

Joe Kropf, analyst with Kropf & Love Consulting, expects futures to rebound slightly after the holiday amid the prospect of grills firing up during spring. The meat industry has always counted on grilling season, but soggy weather and extreme heat can put a damper on outdoor grilling plans, he said.

Futures traders are reluctant to bid up June and August contracts, which are already at lofty levels, versus a year ago, said Kropf. Spot-June CME live cattle's settlement Friday was up nearly 15% compared with a year ago, and August was 14% above last year.

Bob Wilson, analyst with HedgersEdge.com and R.J. O'Brien, expects cattle prices to "hold up" during the first half of June better than some people anticipate because of generally "decent" Memorial Day holiday demand, first-of-the-month pay-period retail purchases and some Father's Day business. That, he said, should help to stabilize boxed beef value's recent drop and underpin the cash and futures markets -- depending on how much gasoline prices siphon off beef demand.

"Then, the good news is really gone," said Wilson who projects a normal seasonal weakness for cash cattle and corresponding futures into the summer.

Downward Seasonal Tendency Is Strong

Wilson initially projected a weekly average cash cattle low in July at $84 to $85 per hundredweight, but raised it slightly to around $86 to $87 to account for South Korea and Japan possibly re-opening their ports to U.S. beef. He declined to offer a CME live cattle outcome during that period because futures may be influenced by several "indeterminate variables."

David Hales, market analyst at Hales Cattle Letter, said he expects this year's choice beef cutout prices to be a mixed affair going into late July. The lighter slaughter rate of the Memorial Day holiday week could support prices near term, but the tendency for declines is strong, he said.

The five-year average shows fed cattle prices declining after the Memorial Day holiday beef purchasing is done, said Jim Robb, agricultural economist at the Livestock Marketing Information Center. After the peak, prices typically drop about 8%-10%, and Robb said he expects a 10% decline this year.

That would take cash cattle prices down to about $88.65 per hundredweight by the time they bottom in July with an estimated futures equivalent of about 89.35 cents a pound, as calculated by Dow Jones based on Robb's proprietary records that show a historic 70-cent basis.

Robb said, though, that while he expected cattle and beef prices to fade seasonally, there could be more volatility than normal due to uncertainties about fuel and feed costs.

-By Lester Aldrich and Theopolis Waters; Dow Jones Newswires; 913-322-5179; lester.aldrich@dowjones.com

(END) Dow Jones Newswires

By Lester Aldrich and Theopolis Waters Of DOW JONES NEWSWIRES

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