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CME: Cattle on Feed Lower than Expected

22 October 2012

US - Friday’s October Cattle On Feed report will almost certainly be viewed as bullish by Live Cattle futures markets on Monday, especially for the deferred contracts, writes Steve Meyer and Len Steiner.

Some highlights are:

September placements were estimated at only 2.004 million head, 19.6% lower than last year and the lowest on record for September by over 140,000 head. The number is nearly 5% lower than analysts expected before the report and implies that fed cattle numbers in the spring of 2013 are going to be VERY, VERY tight. The April contract touched $135.55 on Friday before closing at $134.775. The contract high was set on September 13 at $136.825 — a level which could definitely be within reach given these placement numbers.

This is the third straight month in which placements have been 10% or more lower than last year. The 469,000 head drop from one year ago is the second largest year-on-year reduction since January 2006 and means that cattle feeders have placed 942,000 fewer cattle over the past 6 months than they did just one year ago.

Tight feeder cattle supplies and higher feed prices were more important factors than LC futures that are still not far off their alltime highs set back in August. Even with the lower corn prices of this fall, we think this pressure will continue as any gains in feed prices will be offset by higher feeder cattle prices. Will an increase in fed cattle prices push placements higher? Maybe but not likely since supplies are so tight. The more likely result will just be higher feeders.

There were 10.989 million head of cattle on feed in the surveyed lots. That figure is 2.6% lower than last year, a number very close to the –2.2% average of analysts’ pre-report estimates. The deviation is not likely to move nearby futures much on Monday.

None of these numbers are much of a surprise to beef industry observers.

The long-term downtrend in cattle numbers dates back to the early 1970s and the most recent cyclical reduction dates back to 2006 or 2007, depending on which series one looks at.

And there is more to come. After last year’s drought-driven reduction of beef cow numbers, this year’s calf crop is estimated to be 34.5 million, 2.3% lower than last year.

Those calves will not be available for placement until next year and much of the beef from those calves will not be available until 2014. The Livestock Marketing Information Center in Denver estimates that commercial cattle slaughter will be down 4.5% next year and 5.8% in 2014. Higher weights will offset a poertion of those decline but they are forecasting beef production 4.2% and 4.8% lower in the next 2 years, respectively. If all of those reductions will mean 2014 beef output will be 10.4% lower than in 2010.

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