The rally in cattle prices has further to run, driven by recovering demand for beef at a time of constrained supplies, Commerzbank has said, even as many gave US herd data a lukewarm welcome.

Official statistics on Friday showed the decline in American cattle dynamics declining slower than many analysts had expected, with the number of placements of cattle in feedlots falling by 2%, compared with a forecast 5% drop.

"The Cattle on Feed report was slightly bearish," US Commodities said, a comment echoed by many other brokers.

Live cattle prices, which closed the last session at their highest since November 2008, finished down 0.8% at 92.05 cents a pound in Chicago on Monday, for February delivery. March feeder cattle dropped 0.8% from a six-month top to 101.825 cents a pound.

Historical precedent 

However, US Commodities, noting a "huge" balance of long positions in live cattle futures held by managed funds, also flagged estimates that US beef supplies will fall by almost 7 pounds per head this year.

"The last time this type of decline occurred in the beef industry was from 1985-1988, and the [live cattle] market moved from the mid-50s [cents a pound] to the mid-70s from the lows to the highs," the broker said.

And Commerzbank said that, with the number of cattle held on feedlots falling 2.6% to its lowest January level in seven years, the market retained the dynamics for further gains.

"The decline in the feedlot herd should - with some time lag - result in a decrease in supply of live cattle that is ready for slaughter," the German bank said,

"The price of live cattle… should increase further."

'Prices will rise'

The US herd of both beef and dairy cattle has shrunk to its lowest levels in 50 years, in part because of the higher productivity of milking cows, but also because of the waning profitability of meat operations.

The average net income of cattle farmers slid by 26% last year despite falling corn prices as recession prompted consumers to switch from red to white meat.

However, that trend looks likely to reverse this year as economic revival feeds through, Commerzbank said, noting US Department of Agriculture forecasts of a 10% rise in American beef exports.

"The outlook that a rising demand for beef will coincide with a limited supply and improved export possibilities for US beef leads us to expect that prices for both live cattle and fed cattle will rise in 2010," the bank said.

Prices of live cattle would average 91 cents a pound this year, up 8% on the mean for 2009. The average price of feeder cattle would rise by 6% to 103 cents a pound.