Hedge-Fund Bets on Feeder-Cattle Gain Reach Highest Since 2006

Date: Wednesday, January 19, 2011
Author: Elizabeth Campbell, Bloomberg

Hedge funds are the most bullish on feeder-cattle futures since at least 2006, a sign that speculators may expect tight supplies of the animals to boost prices that already have surged to a record in Chicago.

The funds increased their net-long positions by 5.2 percent in the week ended Jan. 11 to 18,622 futures and options contracts on the Chicago Mercantile Exchange, U.S. Commodity Futures Trading Commission data showed on Jan. 14. The holdings are the largest since at least June 2006, when the CFTC began tracking the data.

The price of feeder cattle, the young animals purchased by feedlots and fattened for slaughter, jumped to a CME record on Jan. 14. The U.S. cattle herd on July 1 was the smallest since 1973, government data show. Funds are anticipating tighter supplies, said Rich Nelson, the director of research at Allendale Inc. in McHenry, Illinois.

“The dramatic liquidation in the cow herd means 2011 calves and feeder supplies will be at levels we haven’t seen for years,” Nelson said Jan. 14.

Five funds are short feeder cattle, or betting prices will fall, while 47 are long, according to the CFTC data. Five new funds bought feeder cattle last week, according to the report.

Feeder-cattle futures for March settlement rose 0.4 cent, or 0.3 percent, to $1.273 a pound on Jan. 14, when the price touched $1.27625, the highest since the commodity started trading in 1971. For the week, the price advanced 3.7 percent, the most since August.

Feedlot operators buy year-old animals that weigh 500 pounds (227 kilograms) to 800 pounds, called feeders. The cattle are fattened on corn until they weigh about 1,200 pounds, when they are sold to meatpackers.

Shrinking Herds

The U.S. cattle herd has been in decline for three straight years and there are no signs of expansion, the U.S. Department of Agriculture said in a Dec. 17 report. The breeding herd for beef cows totaled 31.7 million head on July 1, the USDA said on July 23. That marked the fewest cows for the date since at least 1973, according to Ron Plain, a livestock economist at the University of Missouri in Columbia.

On Jan. 14, wholesale choice beef climbed 0.4 percent to $1.6973 a pound, the highest level since May 13, USDA data show. The price has risen 17 percent in the past year, a sign of increased demand and tighter supplies.

U.S. exporters shipped 215.6 million pounds (97,800 metric tons) of beef in November, the highest monthly total since August 2008, according to the most recent USDA data.

Holdings Increase

The net-long positions held by managed-money funds, including hedge funds, commodity trading advisers and commodity pools, has increased for 12 straight weeks, more than quadrupling from 4,199 contracts on Oct. 19, CFTC data show. Over that period, feeder-cattle futures advanced 13 percent.

Last week’s rally will encourage more fund buying, because supplies are tight and hedge funds are increasingly bullish about the outlook for commodities in 2011, Nelson said.

The Standard & Poor’s GSCI Index of 24 commodities is up 1.8 percent this month after gaining 20 percent last year.

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.