“We have never had this much buying in the cattle market before. It is not realistic to believe that it will continue.”
– DENNIS SMITH, LIVESTOCK BROKER
Investors seeking strong returns in the commodity markets have been pouring money into U. S. cattle futures, sending prices to 15-month highs and boosting February volume 27 per cent from a year ago.
Open interest, a measure of market liquidity, is at a record high in Chicago Mercantile Exchange cattle, and much of that is attributed to index funds – pools of money that generally take only long, or “buy,” positions in a market.
“They (funds) have been adding 4,000 to 9,000 contracts a week for the last four to five weeks,” said Bob Short, a 35-year veteran livestock trader at Chicago brokerage house PFGBest.
Commodities in general have long been considered a specialist’s market subject to wild price swings and suitable mainly as a hedging arena for interests dealing in large quantities of grain, livestock, metals or other raw materials.
But large-pool investors have been drawn to commodit ies over the past several years, often boosting prices and volume in markets including cattle futures.
Commodity Futures Trading Commission data shows index funds held 132,784 long positions in CME cattle as of Feb. 23, up 8.5 per cent from the first of the year and up 55 per cent from a year ago.
CME cattle open interest reached a record 320,169 contracts on Mar. 3, topping the previous records of 318,396 the previous day and 313,549 set in July 2008.
Cattle are attracting investors in part because the United States has the smallest cattle herd in 51 years at a time when an improving economy should boost beef sales.
Broad investment interest has also been generated by ideas that commodities are an effective hedge against inflation.
Funds that used the DJ-UBSCI group of commodity indexes had $43 billion under management in late 2009, versus $35 billion a year earlier, said Rebecca Patterson, spokeswoman for Dow Jones indexes.
“You are getting a lot more market participation by these outside forces,” said Elaine Johnson, analyst with CattleHedging.com.“One of the anticipations is that with all of this money the government has pumped into the economy … we would have inflation.”
BUT IF BUYING STOPS?
While fund buying has been a key driver for cattle, traders worry the markets could fall when that buying stops.
“If the funds quit buying the market is going to sell off,” said PFGBest’s Short.
While there is no indication yet of a slowdown, the concern is there.
“We have never had this much buying in the cattle market before. It is not realistic to believe that it will continue,” said Dennis Smith, livestock broker with Archer Financial in Chicago.
Short and Smith expect the cattle futures to plateau or turn lower in March due to a seasonal downturn in cash cattle prices.
“Seasonally we usually anticipate the cash cattle top to happen in April. The futures anticipate that by the middle of March,” said Short.
This year, Short expects cash cattle to peak at $92 to $93, possibly $94 per cwt.