USDA cattle-on-feed report bullish

Today's monthly U.S. Department of Agriculture cattle-on-feed (COF) report is considered quite bullish by most analysts. Fed cattle prices were up $1-$2 this week and cattle futures contracts on the Chicago Mercantile Exchange have been higher most of the week.

With the COFshowing smaller placements into the feedlots than expected, and higher marketings out of the feedlots than predicted, everything's coming up roses, right?

Undoubtedly wrong. You're dealing with two artificial items in the COF and the Merc, and as experience has proven, there is no substitute for the performance of the actual live breathing cattle, standing on the ground in the feedlot, and the dead ones, hanging on the rail at the packing plant.

The COF and the Merc are neither one of those things. The COF is an estimate, a guess, by economists sitting deep in the bowels of USDA's puzzle palaces in Washington D.C. There is no actual, physical count of the cattle in feedlots, either going in or coming out. The COF number is treated by the traders at the Merc as the holy grail, but its not. Its a guess, that frequently is wrong and changed up to two years after the fact.

By then, the damage has been done and the "correction" affects nothing. But it does show the fallacious nature of the cattle-on-feed report and its unreliability.

Which brings us to the Merc. It is an exchange of paper contracts that don't even represent actual cattle that reallly exist. They are bought and sold by commissioned salesmen, who could really care what happens to the cattle market, as long as it stays volatile, as they make commissions on both buying and selling. They are dead in the water when the market is steady and stable--the way cattle owners like it--because no contracts change hands.

For owners and producers of actual cattle, both the COF and the Merc are wildcards that make their job a lot harder. While touted by their proponents as curbing risk and stabilizing the market--in reality, they do just the opposite. They increase risk and create instability in cattle prices.

It's like the old shell game. They want to keep you guessing as to which shell has the money under it, as they shuffle them around. That's what the Merc and COF do for actual cattlemen, buying and selling real, existing cattle.