Cattle Futures Rise to Highs
As Cash Prices Gallop Ahead

CHICAGO -- Live-cattle futures on the Chicago Mercantile Exchange continued their march upward, rising by their limit for a sixth consecutive session and again registering all-time highs.

The front-month October contract climbed 1.50 cents to 98.82 cents a pound. All contracts through February ended up by the daily limit of 1.50 cents, gaining from 1.5% to 1.7% on the day. Unlike other futures contracts, CME live-cattle daily price limits don't expand after multiple limit moves.

Limited by the daily restriction, futures haven't kept pace with cash prices, which have risen sharply in response to aggressive competition between the nation's beef packers for limited domestic supplies of market-ready animals.

Packers paid record-high prices last week, then started this week with even higher bids. Cash cattle traded Monday from $1.05 to $1.10 a pound, up between 10 cents and 16 cents from sales last week. Cash prices a year ago were at mostly 66 cents on a live basis.

With the 1.5-cent price restriction, October could remain limit-up the rest of the week and reach only $1.0482, well below this week's cash prices.

Unable to buy October futures because of the limit, traders turned their purchases toward the more distant November through February contracts, which boosted those months to their daily limits too.

Cattle producers caught with short hedges in futures -- having sold contracts in expectation of price drops -- are stuck in a vicious circle. Their inability to exit from those trades by purchasing equivalent amounts of futures has forced them to withhold their live cattle from the market, with the sold positions well below the current market level.

The resulting supply tightness has forced beef packers to pay ever higher prices for the remaining cattle. "Feedlots would gladly sell at $1.05 if they could lift their futures hedges," said one floor broker with large feedlot customers.

Monday morning, many floor brokers and analysts said the CME should immediately take an emergency action to alleviate the pressure in October live cattle either by expanding daily price limits or allowing October trading only to liquidate existing positions to alleviate the squeeze on short positions.

The CME had a "no comment" response Monday morning to inquiries about possible remedies for the situation. However, by the afternoon, traders close to the situation said the CME had scheduled an emergency meeting to address the problems.

"What the CME needs to do is allow October to trade only to liquidate existing positions," said Chuck Levitt, analyst with brokerage firm Alaron Trading Corp. "To keep the situation from getting out of hand, the Merc needs to control the positions in the October contract."

"Given the CME already has gone to a two-cent daily limit in lean hogs, it is probably a good idea to go to the two-cent level in live cattle also," said Dan Vaught, analyst with A.G. Edwards & Sons in St. Louis.

Contributing to the surging U.S. cattle and beef markets are tightened supplies resulting from the May 20 ban on imports of all ruminant animals and beef from Canada. Combined, imports of Canadian cattle and beef prior to that time were equal to about 7% of U.S. beef production, according to industry representatives. The loss of these imports has caused supplies in the U.S. to run short. Several other countries also banned Canadian beef at that time, which has resulted in expanded demand for U.S. beef in the international markets.

The beef ban was partially lifted in August, but the beef coming into the U.S. from Canada so far has amounted to only a small portion compared with the amount prior to May 20.

In other commodity markets:

COPPER: High-grade copper futures gained on the Comex division of the New York Mercantile Exchange on hopes of an improving U.S. economy. The major buyers were speculative funds drawn in by supportive "technicals," or patterns in price charts. The December contract rose 2.4 cents a pound to 88.75 cents, having set a contract high of 89 cents.

SOYBEANS: Soybean futures at the Chicago Board of Trade rallied in a continued reaction to a report Friday from the U.S. Agriculture Department, which forecast a smaller-than-expected U.S. crop this year. November futures rose 18 cents a bushel to $7.315.

Write to Curt Thacker at cthacker@osterdowjones.com¹ and Jim Cote at jcote@osterdowjones.com²

Updated October 13, 2003 9:08 p.m.