Feb 24, 2012

Weights distort placements

Last week’s fed cattle trade reports hinted at a shortage of cattle and had discussion of cattle feeders not backing up market ready cattle, which some analysts say is creating a marketing problem. When packers pay $5-6 more for cattle, they simply need the cattle, so the idea that we have too many market ready cattle just doesn’t seem right.

For the week ending on Feb. 10, packers and feeders were at a complete standstill until Friday morning when futures markets advanced a $1.50 on the February contract and trade subsequently took off and cash fed trade was reported at $128-129, $2 more than feeders were asking early in the week. Fed trade was $4-6 higher for the week.

Packers have reduced slaughter rates and moved the beef cutout values up to $192. They’ve been able to close their operating margins to a negative $22 per head. The week earlier, they were losing $60 per head. Then in a matter of a few hours, they lost all their gains and were deeper in the red.

It’s no question, feeders need to advance this market to break even on market ready cattle and many feeders have reported breakevens between $135-140 on cattle going forward. There has been some discussion that cattle are starting to back up in feedlots.

However, looking at last week’s market behavior, it’s hard to figure where the cattle are backing up.

Many market watchers look at carcass weights to justify those thoughts. Carcass weights have started to rise to above seasonal weights and averaged 860 pounds on steers and 797 pounds on heifers two weeks ago. A year ago, fed steer carcasses averaged 845 pounds and heifers were at 777 pounds, a 15-pound increase from year to year. There is no question we are producing larger cattle, but I’m not certain this is creating marketing problems.

Cattle feeders have enjoyed a fairly mild winter and feed gains are much better than a year ago; however, cattle show lists are much smaller than a year ago. The Texas Cattle Feeders Association (TCFA) reported that their current show list is 45 percent smaller than the same week a year ago. Their show list represents 62 feedlots which accounts for 73 percent of TCFA members’ total feeding capacity.

This next cattle on feed report is expected to show only 2 percent more cattle on feed than a year ago and only reports on feedlots of over a 1,000 head. There is a significant change occurring in cattle feeding and smaller lots are quickly vanishing. Farmer feeders used to represent nearly 22 percent of total cattle on feed and today, they only represent 16 percent. That segment of beef production is down 10 percent just this last year, according to Jim Robb at the Livestock Marketing Information Center.

Robb also said one of the least noticed statistics in USDA’s Jan. 1 cattle inventory report is the number of all cattle on feed nationally. The inventory report showed an important downsizing. Many market watchers have been confused why the monthly cattle on feed reports have shown large year-over-year increases. Even grain market analysts have been puzzled by why more feedstuffs have not been used.

The number of cattle on feed in all feedlots is measured only twice a year and as of Jan. 1, all feedlots only had 1 percent more cattle on feed. So the unreported monthly feedlots had about 240,000 fewer cattle on feed, which reflects the idea smaller feeding operations are selling, rather than feeding, their corn.

In other words, the level of currentness in market ready fed cattle is hard to measure under current circumstances. Placement patterns of feeder cattle has been distorted because of the drought and carcass weights may not be the proper tool to measure just how current fed cattle marketings are.

There is also a new twist in the game; beta antagonists have become more prevalent in cattle feeding management over the past year. Last year, many of the largest cattle feeders were not using the product. Today, it has been estimated that 60 to 70 percent of the nation’s cattle feeders are using those products which can add 30 to 50 pounds of gain in the last 30 days of the feeding cycle. We’ve been told using those products doesn’t really allow feeders to carry over many cattle. When they are done, they need to go.

But I would have to say that watching packers pony up $5-6 more for cattle while they are reducing slaughter production suggests strongly that we don’t have too many cattle in feedlots that are ready to go. After last week’s episode, I do think this fed market could go higher. But the big question is, will consumers tolerate higher and higher beef prices? — PETE CROW