Placements decline over 4 times more than expected

Markets
Sep 3, 2013
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Calling the most recent Cattle on Feed (COF) report “bullish” is something of an understatement. Instead of the usual bovine mascot for that market scenario—horned, alert, ready for action— let’s substitute something more extreme. Like a rodeo bull or a Spanish fighting bull. Whatever it is, it gored the market last week and sent it flying.

Placements in the most recent COF report—released late afternoon Friday, Aug 23, and covering cattle on feed in feedlots of 1,000 head or more as of Aug 1, or placed in or marketed from the samesized feedlots during July—were drastically low. Analysts had expected reduced placements in July 2013 compared to July 2012, but the magnitude caught everyone off guard; down 10.4 percent compared to the expected 2.5 percent decline. The 1.72 million head placed in July was down 200,000 head from July 2013.

After expressing surprise—as did just about everyone in the industry who commented on it—Troy Vetterkind of Vetterkind Cattle Brokerage called the whole situation a puzzle. He offered some potential reasons behind the placement drop.

“Several different things at play here, and of course the biggest piece of the puzzle is that we do have 1-2 percent fewer cattle numbers this year compared to last. Another feature is large year over year decreases in Mexican feeder cattle coming north due to better forage conditions in that country keeping more lightweight cattle at home.

“We also have much improved forage conditions on the southern plains and intermountain west, which is keeping cattle on pasture longer than normal this year. And of course due to better forage conditions in some of the driest spots of the country I think we are seeing a certain amount of heifer retention.”

Though it is not what one usually thinks about with COF numbers, the slowdown in dairy cow culling and the decline in imports of cull cows from Canada that we have been experiencing lately, are also playing a role in this decline in placements.

Placements across the weight categories were also down across the board, but still showed the current market’s taste for heavier cattle. Compared to July 2012, placements of cattle in the lightest class (under 600 lbs.) declined 22 percent at 390,000 head. The next heaviest class, cattle weighing between 600-699 lbs., declined 15.4 percent to 275,000 head. The 700-799 lbs. class of cattle saw the smallest decline in placement numbers—down 3.2 percent at 455,000 head— but the heaviest class of cattle still saw the largest placements. Pun intended.

With 602,000 head of cattle weighing over 800 lbs during July, that class saw a 4 percent decline compared to July of 2012. The fact these heavier cattle have held up so much and the lightweights have lagged so heavily in the placements can be attributed to what has been called a reprieve in the drought.

Improved pasture conditions in many parts of the country—both compared to recent months and especially compared to last year— are encouraging many to sell cattle to feedyards later. The premium in deferred feeder futures markets are also encouraging producers to hold onto lighter calves to take advantage of those cattlestrapped months ahead.

“The incentive to add pounds outside of feedlots is still strong,” said Steve Meyer and Len Steiner of CME’s Daily Livestock Report. “We also suspect that improved pasture conditions may have slowed what we believe was some significant May and June placements of heifers originally intended for cow herds.”

They explained that heifers held as replacements numbered 5.361 million head on Jan. 1, 2013, which was higher than the same time in both 2012 and 2011.

“Continued dry conditions in the Northern Plains and West likely drove some of those females into feedlots— at heavy weights—but improving pasture conditions may now be providing enough carrying capacity. We had suspected that some heifers could move back to pasture but the report’s 60,000 head estimate for ‘Other Disappearance’ is almost exactly the same as one month ago and quite normal for July.

Though the placement numbers were the biggest surprise, the number of cattle on feed as of Aug. 1 was also unexpected. At 10.03 million head on feed, the Aug. 1 number declined 5.9 percent compared to last year. The average estimate from analysts polled before the release was an on-feed decline of 4.2 percent.

“That figure is 1.7 percent lower than analysts had, on average, expected going into the report, meaning that there are about 180,000 fewer cattle on hand than was expected as of August 1,” concluded Meyer and Steiner of the on-feed numbers.

“It also means that feedlot inventories are again more than 600,000 head smaller than last year. That was the case from November 2012 through April before larger placements pulled inventories within 400,000 head of year-ago levels in May, June and July.”

Marketings were the least surprising, coming in almost exactly at the average prereport estimate of up 4.4 percent. At 2 million head marketed in July, the increase from July 2012 was 4.5 percent. The one mitigating factor is that there was one more marketing day in this past July compared to July 2012. Meyer and Steiner pointed out that it is unknown if the analysts estimates took that fact into account.

The reaction of the market to the bullish report results were fairly immediate, though any reaction the feeder futures might have had to the report were wiped out by the activities of the corn market. Monday morning, Vetterkind reported many feedlots were passing steady packer bids on Friday after the COF report was released. Cattle instead went onto last week’s showlists with attentions on the futures markets.

The deferred live cattle futures reacted favorably to the COF report’s results. Every contract from December 2013 on gained close to $1 from Monday’s open and close alone, with the exception of April 2014, which gained $1.1. Some of those gains were taken back in part by Tuesday which closed with most deferred contracts losing around 40 cents.

For more information on the impacts of the COF report on the cash and futures markets, as well as the activities of corn on feeders, see this week’s market story on the front page. — Kerry Halladay, WLJ Editor

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