February 26, 2013 / 8:35 PM / 6 years ago

U.S. livestock trading slows ahead of federal spending cuts

CHICAGO, Feb 26 (Reuters) - Trading in Chicago livestock futures has declined this week as traders worry that furloughs at the U.S. Agriculture Department, due to federal automatic spending cuts, will disrupt cattle and hog marketings and price reporting

At question is whether the furloughs will impact the agency’s Agricultural Marketing Service (AMS), which among other things generates prices used as benchmarks for some livestock contracts on the CME Group’s exchange.

The U.S. Department of Agriculture has said 8,400 meat inspectors could be idled by the automatic budget cuts, set to come into effect on March 1, but has not said how the AMS will be impacted.

Cattle traders are playing it cautious. Commercial traders and speculators have been taking money out of the market during the past week because they do not know if they will be able to unwind those positions once the spending cuts are enacted, traders said.

This action has limited gains in livestock futures despite a winter storm in the U.S. Plains that could disrupt cattle marketings.

“Most of the time we would have guys buying just on this storm alone and being a little bit more aggressive but with this uncertainty it has got guys sitting on their hands a little bit,” said Jason Britt, president of Central States Commodities in Kansas City, Missouri.

A CME spokesman said on Tuesday it was closely monitoring the possible impact of the budget cuts but did not say if trading in affected contracts would be halted. The exchange operator also said it would keep its customers informed of potential changes to its delivery or settlement procedures due to the cuts, which will be enacted on Friday.

CME said last week that exchange rules allow it to modify the delivery and settlement rules pertaining to its live cattle contracts if USDA staff is not available for grading and inspections. The exchange did not say if other contracts affected by the cuts could also be modified.

Market players said the uncertainty could be seen in recent price activity. CME live cattle prices have risen just 0.5 percent during the past week, despite the severe winter storms that have dumped more than a foot of snow in parts of Kansas and Texas and that will likely slash weight from feedlot cattle.

Daily trading volume in CME’s live cattle futures has averaged just 43,787 contracts since the exchange operator announced it could be affected by the sequester on Thursday, down from 58,255 contracts during the previous week.

Concerns that a glut of livestock could develop if USDA inspectors are unavailable have kept cattle prices in check, traders said.

“Feeder lots are real nervous that they are not going to be able to move this product,” said Tom Grisafi, president and chief executive of trading firm Indiana Grain Co.

Cash settled livestock and dairy products require data that may be unavailable because of the sequester, CME said last week. Additionally, the daily calculation of the CME Feeder Cattle Index and CME Lean Hog index, the monthly calculation used to determine settlement prices for CME Dairy futures products, and spot call dairy markets could be disrupted.

U.S. Agriculture Secretary Tom Vilsack has said that it could be months before a threatened shutdown of U.S. meat plants would occur because of a furlough of meat inspectors. USDA employees get from 30 to as many as 120 days notice of impending layoffs. By law, plants cannot ship meat without the Agriculture Department’s inspection seal.

The $85 billion in automatic across-the-board spending cuts, are set to take effect on March 1 unless Congress can come up with a deal to avoid them. Food inspections, air traffic control, law enforcement and education programs also would be among those hit.

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