On feed numbers support late 2007/early 2008 expectations

Cattle Market & Farm Reports, Editorials
Oct 1, 2007
by WLJ

— Cattle on feed numbers total 10.3 million head, down 6 percent from 2006.

— Placements drop 7.5 percent.

— Marketings, even with last year, remain a blemish in an otherwise bullish report.

The Sept. 1 cattle on feed report contained more good news for cattle feeders and cow/calf producers. On feed and placement numbers were inline with analyst’s pre-report expectations. As expected, it was the third consecutive month showing lighter placements and tighter fed cattle supplies ahead, paving the way for strong markets well into next year.

The number of cattle on feed totaled 10.3 million head on Sept. 1, 2007. The inventory was 6 percent below the same date last year, but 3 percent above Sept. 1, 2005.
“Looking inside the numbers, it’s clear inventories are down in nearly all the major cattle feeding states from a year ago,” American Farm Bureau Federation Livestock Economist Jim Sartwelle said.

“We witnessed a none-too-subtle shift in feeder cattle placements from the south Plains to Nebraska, South Dakota and Iowa last fall and winter,” Sartwelle said. “This was in response to increased corn prices and the attraction of ample supplies of ethanol co-products in those key corn-growing states to the fed cattle sector.”

As with each report this year, the trend in cattle feeding continues to show a shift toward the northern Plains, with on feed numbers in Iowa and South Dakota climbing 8 percent and 13 percent higher, respectively, than September 2006 counts. Meanwhile, on feed numbers in Texas dropped 7 percent and feedlot numbers in Kansas declined 10 percent, while Colorado on feed number were down 10 percent. In Idaho, on feed numbers dropped 13 percent, likely as a result of Tyson’s plant closure there last year which has meant cattle must be trucked farther for processing, reducing the incentive to feed in the region.
However, despite the migration toward northern states, Sartwelle said there is reason to believe that trend may not hold up in the future.

“As the year has worn on, some of the advantages in Nebraska, South Dakota and Iowa have fallen prey to cyclically reduced feeder cattle supplies,” he said. That’s because in August, only South Dakota and Arizona saw feeder cattle placements above 2006 levels, with numbers up 23 percent and 20 percent, respectively, Sartwelle said. “In addition, although cash corn prices decreased markedly through the summer, the stigma surrounding placing lighter weight cattle remains.”
Placements in feedlots during August totaled 2.12 million, 7 percent below 2006 but 6 percent above 2005. Net placements were 2.07 million. During August, placements of cattle and calves weighing less than 600 pounds were 490,000, 600-699 pounds were 440,000, 700-799 pounds were 549,000, and 800 pounds and greater were 640,000.
“During August 2007, placements of cattle that weighed between 600 pounds and 799 pounds actually increased relative to 2006, but the drop—by 190,000 head—in cattle weighing less than 600 pounds more than made up for those modest increases. We are unsure how much of this loss is due to projected costs of gain for 500-pound calves and how much is due to there just not being many 500-pound calves available during August,” Sartwelle said.

HedgersEdge.com market analyst Andy Gottschalk agreed with Sartwelle’s comments on the stigma surrounding lightweight calves and went one step farther in his analysis, saying that the drop in calf value, as a result, has created a potential opportunity for profits.

“Calf prices continue to weaken relative to the price of feeders and fed value. Versus feeders, calves are trading at their lowest level since September 2003,” Gottschalk said. “This condition creates an opportunity to swap from that which is ‘overpriced’ (feeders) to that which is ‘underpriced’ (calves),” he said.

Gottschalk offered the following example:
“If calves are placed in a grow yard, significant profits are available. Using a cost of gain of $60 per cwt., a 550 pound steer calf grown to 750 pounds would require a selling price of $134 or greater to allow only a breakeven, versus the January feeder futures currently trading at $114.50. Any price under $134 for 550 pound steer calves would capture additional profits to the producer, if those cattle were grown to 750 pounds,” he said.

 “Under a similar scenario, a 450 pound steer calf grown to 700 pounds would benefit if the selling price received for the steer calf was less than $144 per cwt.”

In terms of fed cattle marketings, many analysts attributed the lackluster number to multiple factors. Among the most commonly cited reasons was the significant premium offered by October cattle contracts over August on the Chicago Mercantile Exchange, giving cattle feeders reason to hold cattle over. However, the result was record carcass weights for this time of year.

“Carcass weights continue to raise a caution flag, which should encourage more aggressive marketings of fed cattle,” said Gottschalk. “This industry must still market though May Placements, which were sharply above April and prior year levels.”

He said the overall effect of slow marketings in August is likely to be offset by the tight supplies during the fourth quarter of 2007. However, Gottschalk cautioned that demand is going to be the primary driver of fed cattle prices, rather than supply.

“We are convinced that our price forecast of a $97 fourth quarter high is likely to be exceeded. We would not rule out a run at $100 as fed cattle supplies tighten during the November- December time frame,” he said. — John Robinson, WLJ Editor