High placements make for bearish report

Markets
May 27, 2013
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The most recent Cattle on Feed (COF) report came out Friday, May 17. It reported that cattle on feed as of May 1 in feedlots with a 1,000-head or larger capacity was down, while cattle placed on feed and marketed during the month of April were both up. Analysts have read this report as moderately bearish and negative by futures trade as placements exceeded expectations and marketings were under expectations.

Cattle on feed as of May 1 amounted to 10.74 million head, 3.4 percent lower than May 1 last year, and the lowest on-feed number since 2010. The number came in slightly above pre-report analyst expectations which anticipated a decline of 3.7 percent. All in all, this is in line with the expectations. Steve Meyer and Len Steiner of CME’s Daily Livestock Report pointed out that this was the ninth straight month with year-to-year declines in on-feed numbers. That said, 3.4 percent is the smallest decline so far.

All four of the major cattle-feeding states saw year-to-year declines in the number of cattle on feed on May 1. Colorado’s on-feed numbers were down 7 percent at 960,000 head. Kansas saw a 1 percent decline from May 1, 2012, with 2.06 million head on feed. Nebraska was down 3 percent at 2.39 million head, and Texas was down 6 percent with 2.54 million head on feed.

California was the only state to see more cattle on feed as of May 1 compared to last year at up 3 percent with 490,000 head. Arizona and Oklahoma both maintained a weak steady compared to the same time last year at 275,000 head and 295,000 head, respectively.

Placements were the biggest surprise in this largely as-expected COF report. Placements during April were up 15.1 percent compared to the prior year with 1.75 million placed, and up 3 percent above the pre-report industry expectations. This is also where much of the bearishness of this report lay, along with the fact the weight-breakdown of placements was so heavily skewed.

 

It is important to keep in mind, however, that last year’s placements during April were the lowest since 2002, and that there was one additional business day in this April as compared to last, both of which distort the number. When accounting for the additional day, Meyer and Steiner suggest the number would be more like 10 percent above last year’s April placements. When compared to the five-year average, this April’s placements were down 6.4 percent.

The Livestock Marketing Information Center raised an interesting question in its review of the report: how could there be a 15 percent increase in placements when the 2012 calf crop was smaller? It offered a few possibilities, among them the already cited issues with the comparison 2012 numbers.

“Several other factors may also have contributed to larger placements. USDA-AMS reported that April nationwide feeder cattle auction receipts were up 15 percent. Very dry conditions during April in the western side of the Plains states from Texas to North Dakota likely caused additional sales of feeder cattle. In the Northern Plains, more calves than normal were backgrounded and were marketed during April.”

With three minor exceptions (Arizona, South Dakota and Washington), all reported states saw placement increases. Of the largest cattle-feeding states, Colorado and Kansas saw a 17 percent increase in April placements with 140,000 head and 350,000 head placed, respectively. Nebraska’s April placements went up 22 percent at 450,000 head, and Texas saw the smallest percentile increase (6 percent) with 435,000 head.

“The largest placement gains were in the Cornbelt where cheaper feed was the main attraction,” noted Andrew Gottschalk of Hedgers Edge. “The large April placements reduced the buildup in feeders and calves outside feed yards by approximately two-thirds. Our estimate of this Y/Y increase of feeders and calves outside feed yards on April 1 was 335,000 head. April placements increased by more than 200,000 head Y/Y.”

The distribution of weight classes among the placed cattle was the biggest news of this report. Gottschalk opined that the trend towards placing heavier cattle will likely defer the timing of the seasonal placement low, which usually happens in July. The placement of heavier cattle will also mean they did well outside of feedlots, will be in feedlots for a shorter time, and we could see heavier carcasses in the near future.

All weight classes of cattle saw year-to-year increases for April placements, but the cattle under 600 pounds, and those between 600-699 pounds, were placed at rates below the overall increase in placements. The lightest category saw 375,000 head placed, up 5.6 percent from April 2012. The 600-699 group had 270,000 head placed, up 8 percent.

The two heaviest classes—700-799 pounds and over 800 pounds—were both placed about the overall 15 percent placement increase. The 700 to 799-pound group was placed at rates of 455,000 head (up 19.7 percent) and 650,000 head (up 21.3 percent).

“The average weight of cattle placed in April was 728.9 pounds, 23.7 pounds or 3.4 percent higher than one year ago,” noted Meyer and Steiner. “These are very big cattle as that average weight is the fifth highest monthly figures since 2003. April’s average weight was over 20 pounds higher than the average for April for 2007-2011… High feed prices have created plenty of incentives to put weight on cattle OUTSIDE of feedlots.”

The North America Risk Management Service noted that the May placements for 2012 were unusually high, suggesting the possibility this May’s placements (reported in the next COF report, coming out June 21) will show year-to-year declines. Gottschalk, however, noted that May placements year-to-date as of the Monday following the report’s release were 7-10 percent lower.

Marketings during April amounted to 1.86 million head, 2.2 percent above the same time last year. This was 0.7 percent lower than what analysts predicted prior to the report’s release and this difference is said to contribute to the bearishness of the report’s receipt.

The top cattle-feeding states were mixed in terms of marketings in April. Kansas was down 4 percent compared to April 2012, with 365,000 head marketed. Colorado was steady with its prior year marketing numbers at 150,000 head. Texas and Nebraska’s marketings were up 1 percent and 12 percent, respectively, with both marketing 470,000 head.

The North America Risk Management Service pointed out that marketings projected from current placements point to a relatively flat future as compared to the usual seasonal dropoff. The group called marketings “not great” but decent compared to earlier placements against April. April marketings were also brisk enough to keep feedlot inventories current. — Kerry Halladay, WLJ Editor


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