Cattle on feed report confirms large placements

Markets
Aug 26, 2011
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Last week’s USDA cattle on feed report confirmed that the devastating drought in the southern Plains continues to impact producers in Texas and Oklahoma and is also affecting the cattle markets.

With the third-highest Aug. 1 inventory since the series began in 1996, The National Agricultural Statistics Service reported that the number of cattle on feed in feedlots of 1,000 head or more in the U.S. rose to just above 10.6 million. This inventory was 8 percent above Aug. 1, 2010, numbers. In addition, it is the 15th straight month of year-over-year increases.

Analysts are confident that the increase seen in July was driven by weather, with early beginnings of the normal increase in placements that typically start in September.

Placements during July hit a historical high, reaching 2.15 million, 22 percent above 2010. This is the largest placement total for the month since the series began, according to USDA. The drought in the south continues to be the cause of increase, with depleted pastures and other feed resources forcing heavy culling and herd liquidation.

With placements up in all weight categories, the distribution was skewed toward the lighter end. Placements in the under-600pound weight category were 50 percent higher than one year ago.

This compares to about 6 percent higher placements in the over- 800-pound category. Cattle weighing less than 600 pounds accounted for about 29 percent of July placements nationally. Historically, the under-600-pound class would account for about 24 percent.

Market analysts note the lighter-weight cattle will end up on feed longer because of the early placement, and will finish at lighter weights. Some will finish in the first quarter of 2012. The slight increase in July placements of heavy feeders counters the drought conditions with obvious good forage in other regions. These cattle will slightly increase fourth-quarter marketing.

According to Steve Meyer and Len Steiner at the Chicago Mercantile Exchange (CME), the big question is whether last week’s $4-5 declines for fourth quarter of 2011 and first quarter of 2012 live cattle futures represents a full accounting of the true numbers or just higher placements that are already in the market.

Meyer and Steiner point out the movement of younger, lighter cattle into yards is apparent considering the average weights of monthly placements. In addition, only once this year has a month’s average placement weight exceeded that of one year earlier.

Using the mid-point of each weight class, the calculated average placement weight comes in at about 702 pounds, 17 pounds less than a year ago, showing evidence of early culling. The state breakdown on placements also shows drought patterns. In Texas and Oklahoma, placements were 154 percent and 176 percent of 2010 placements. These were by far the largest increases of the 11 reported states. In contrast, Nebraska placements were up by only 5 percent. Iowa and South Dakota both saw a substantial decrease in placement, down 13 percent and 33 percent, respectively.

“It looks like high feeder calf and corn prices encouraged many of that region’s farmer/feeders to opt out of feeding—at least for now,” according to John D. Anderson, Ph.D., senior economist at American Farm Bureau Federation.

The on-feed figure was in line with the average pre-report estimates and placements were just slightly above average pre-reports. Analysts noted last week that the on-feed and placement figures were large, but they were not entirely unanticipated. Estimated at 107.5 percent, on-feed came in at 108 percent. Estimated at 116.9 percent, placements came in at 122 percent.

According to Anderson, July marketings exceeded expectations, coming in fractionally higher than a year ago. This helped mitigate the impact of what he said could have been a bearish report.

The net impact on fed cattle markets appears to be small. Analysts anticipate fourth-quarter beef production to be small, around 5 percent, with first and second quarter decreases to follow also smaller. Meyer and Steiner predict that cow/calf operators will see profits if they can just keep their cow herds intact. Some producers are diligently working to make sure that happens.

“Analysts should make a note to watch other disappearance in future cattle on feed reports should rain come to the southern Plains. Some of these cattle could move back home,” according to Meyer and Steiner’s CME report.


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