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CME: Cattle on Feed Report Moderately Bullish

21 May 2012

US - Friday’s monthly Cattle on Feed Report from USDA will most likely be viewed as moderately bullish in today’s trading, especially for the deferred contracts, write Steve Meyer and Len Steiner.

The 1 May inventory of cattle in feedlots with capacities of 1000 head an more was 11.11 million head, 0.6 per cent smaller than one year ago. This marks the first monthly inventory in two years that has been smaller than one year earlier. The year-on-year percentage for total inventory is within 1 per cent of the average of analysts’ pre-report estimates. As can be seen in the chart below, feedlot inventories are very close to their 5-year average now after spending the better part of the past year well above those levels. Further, while this month’s number was smaller than last year, inventories remain 6.5 per cent larger than two years ago.

The key number in Friday’s report, however, was the placement figure. USDA’s survey found that 1.521 million head of cattle were placed on feed during April, 264,000 or 14.8 per cent fewer than last year. The trade had expected this number to be much smaller than last year with the average of analysts forecasts being 88.4 per cent of last year’s level. The March-April selloff in Live Cattle futures was much more dramatic than the decline in feeder cattle prices and lower corn prices could not make the feeding margin picture bright enough to avoid a large reduction in placements. The 3.2 per cent discrepancy between the expected an actual figures will be, we think, bullish for Live Cattle futures for this fall and beyond. Total 2012 feedlot placements are now 500,000 head LOWER than one year ago.

In addition to lower placements, other disappearance was 30 per cent higher this year. That number sounds more impressive than the actual numbers — 78,000 head this year versus 60,000 last year — but that additional removal of cattle from feedyards makes the net placement figure for April even lower at 83.7 per cent or one year ago. These removals are likely cattle that had been grown in yards on relatively low energy diets with the express idea of moving them to grass this spring. Other disappearance usually peaks in April or May each year as pastures become more available. That did not happen in 2011 due to very dry conditions in the Southwest. The other disappearance numbers were abnormally high last fall when nearly 100,000 were moved out of lots in October and November. We are confident that most of those were headed for wheat pasture in the face of rising feed costs.

We expect this pattern of lower placements to continue through this summer. USDA’s 1 January cattle inventory pegged feeder cattle supplies outside of feedlots at 25.844 million head, 4 per cent lower than one year ago and the smallest number on record.

And then there is the inventory vs. slaughter factor. For the 18 month from June 2010 through December 2011, the inventory of cattle in these 1000-head and over feedlots averaged 4.1 per cent larger than one year earlier. Allowing a 6-month feeding period, steer and heifer slaughter for December 2010 through January 2012 averaged 0.9 per cent lower (using weekly data) than one year before. Why the lower slaughter relative to cattle numbers?

This discrepancy has been driven by a number of factors. A primary one, of course, was that cattle were placed at lighter weights for much of that period. Short wheat pasture in the fall of 2010 and last summer’s hot, dry conditions pushed cattle into lots early, increasing the time they spent on feed and slowing the turnover rate. The rate has been slowed at other times by high grain costs which meant optimal costs of gains could be achieved with slightly “cooler” diets and slower growth rates. Packer margins slowed slaughter rates this spring. Finally, we believe there are now more yards being included in the survey as some mid-western operations have grown due the availability and cost advantages of distillers dried grains with solubles (DDGS) from ethanol plants. More 1000-plus feedlots mean a larger universe for the inventory survey while slaughter is still counted the same way it always was.

The bottom line of this discussion is that we expect steer and heifer slaughter to continue to run at lower numbers relative to feedlot inventories for some time to come. At some point the year-on- year comparisons will stabilize once more but until then, predicting steer and heifer slaughter from cattle-on-feed inventories will remain difficult with models based on historical relationships frequently over-shooting actual slaughter levels.

And about those drought conditions. Check out the latest map here. Conditions continue to improve in Texas and Oklahoma and the northern Cornbelt area but worsen in Alabama, Georgia, Florida and South Carolina.

Further Reading

You can view the Cattle on Feed report by clicking here.

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