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[OCT. 21, 2003]  URBANA -- A spectacular run for cattle prices has them still searching for the top of the market, said a Purdue University Extension marketing specialist.

"October futures were near $70 in late June before rallying to near $85 by late September," said Chris Hurt. "By Oct. 15, they reached a high of $103.60, a new record. Prior to this year, the previous high was $84.30, established in March of 1993. The question now is, Where is the top? While no one knows, a strong argument can be made that the top was made this past week, on Oct. 15.

"The final answer will depend on the supply of market-ready cattle this fall, how consumers react to record-high beef prices, futures market performance and short-run market psychology."

Hurt's comments came as he reviewed the state of cattle and beef prices.

Market supplies are tight due to continued reductions in the size of the U.S. calf crop, restrictions on Canadian feeder cattle imports and a small number of feedlot placements last winter, Hurt noted.

"The number of cattle on feed was down about 8 percent in the first four months of this year, as feedlot managers were hesitant to put cattle in the feedlot, with high-priced corn," he said. "Placements picked up in the spring and were up 13 percent in October. The current on-feed number stands at only 2 percent lower than the number on feed at this time last year."

The biggest supply news, however, has been the tiny number of cattle available for slaughter in the past two weeks. Last week, the number of cattle marketed was down 13 percent from the same week last year and down 9 percent from the previous week. In combination with the light weights, beef supplies have been down 13 percent and 17 percent, respectively, compared to the same weeks a year ago.

"Part of the restricted marketings from feedlots was due to the 'locked-limit up' October futures for five consecutive days, which totaled five of the nine trading days in the past two weeks," said Hurt. "Feedlot managers with short hedges in place were rightfully unwilling to sell live cattle when they could not lift their hedges by purchasing futures.

"When the Chicago Mercantile Exchange raised the daily limits on Oct. 15, the futures market finally was able to trade and perform its critical function as a hedging mechanism."

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With only 2 percent fewer cattle on feed and with the potential for an orderly hedging mechanism in futures, there is little reason to believe that cattle numbers will not return to a more realistic level, which is down 3 percent to 4 percent, said Hurt. With weights continuing down 3 percent to 4 percent, about 6 percent to 8 percent less beef will be produced this fall. In addition, the number of cattle that weighed 800 pounds or more and were put on feed in September was up 22 percent. These cattle will reach slaughter this winter.

"Another indicator of the cattle price top is when beef consumers begin to look for alternatives to escalated beef prices," Hurt noted. "'Sticker shock' will likely hit consumers at grocery stores in the next two weeks but may take longer for fast-food establishments and table-service restaurants that are hesitant to change menu pricing until their margins are tightly squeezed.

"While consumers have seemingly been willing to pay the higher beef prices up to this point, that will likely begin to change quickly. When packer margins erode, packer bids will drop. Meat retailers will find plentiful supplies of pork at moderate prices for weekly specials this fall. Chicken supplies are also expected to be about 2 percent larger, with turkey supplies about the same as a year ago, according to USDA estimates."

Concerns about imports of beef from Canada from animals less than 30 months of age were raised in the past two weeks when Japan discovered their eighth BSE (mad cow disease) case in cattle. This case was a calf only 23 months of age.

"USDA will first be concerned about food safety as we begin to import Canadian beef, but once food safety can be secured, consumer groups may also call for an acceleration of Canadian imports," he said. "What does all this mean for the cattle industry?"

Hurt believes that cattle prices are far above what we can reasonably expect in an orderly supply-and-demand situation for fall.

"If this proves to be a correct statement, pricing as many cattle as possible now makes sense," he said. "This likely includes selling lightweight animals as soon as possible and the consideration of hedging cattle that will be marketed later this year and into the winter.

"Tremendous feeder cattle and calf prices mean that calves should be sold and not retained for feeding. Prices for animals that move into feedlots should be based on current futures prices and likely should be hedged."

[University of Illinois news release]

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