US - Friday's 'on feed' report may surprise many by edging higher than a year ago after a period of aggressive feedlot placements, is the message of Steve Meyer and Len Steiner's daily livestock report.
Fed cattle futures have been quite volatile in recent weeks as market participants try to balance reports of still very high cash prices for market ready cattle with expectations of a significant rebound in fed supplies into the summer, write Messrs Meyer and Steiner.
USDA will release on Friday, April 25, the results of its monthly survey of feedlots that as of April 1 had a capacity of +1000 head of cattle on feed.
Analysts polled by Dow Jones ahead of this report indicated that on average they expect total on feed supplies as of April 1 to be slightly higher than a year ago, add Mr Steiner and Meyer.
This may come as a surprise to those that have not been paying attention to the last three feedlot inventory surveys. After all, how is it that cattle prices are near all time record highs and yet on feed supplies will surpass last year’s levels?
It is worth taking a step back and taking stock of what has happened so far. The spike in fed prices this winter was caused by a combination of a marketing hole developed by very small placements last summer combined with extreme winter weather effects.
Feedlot supplies were lower in December and January and supplies of market ready cattle were even smaller than what the total inventory suggested. While the average feedlot inventory over time reflects the number of calves born in previous years, how those calves flow into feedlots is determined by a combination of future fed cattle prices, feed costs, pasture conditions and the willingness of cow-calf operators to retain heifers for herd rebuilding purposes.
The sharp rise in future fed cattle prices and lower feed costs have encouraged feedlots to be very aggressive in placing cattle on feed.
In the previous four months (Dec - Mar), feedlot placements have increased by some half a million head (+8 per cent ) compared to the same period the previous year. It is important to recognize this pattern of placements and what it tells us about the structure of feedlot inventories as of April 1.
While it may true that the inventory numbers at the start of April were about the same as last year, the supply of cattle that are market ready still is much smaller than last year.
Let us assume that the average of analysts polled is close to reality: i.e. total on feed supplies as of April 1 were around 10.968 million head while placements of cattle on feed in March were about 1.914 million head (+1.6 per cent ).
This would imply that the April 1 supply of cattle that have been on feed more than 120 days still is down about 11 per cent compared to a year ago. In other words, in the very short term, feedlot supplies still remain quite a bit smaller than a year ago and feedlot operators can afford to hold out.
The latest USDA reports indicated that cash prices for fed cattle still are hovering somewhere between $144-146/cwt, reflecting this shortage in supplies of market ready stock. But this will quickly change in the next three months, however, which is why futures still maintain a very large discount into the summer months.
August fed cattle prices currently are trading at just a little under $133/cwt, a $10/cwt discount to April futures. This may appear like a big discount until we consider that supplies of market ready cattle will quickly increase and by August they could be significantly higher than a year ago.
The April inventory survey will provide an indication as to the number of steers and heifers placed on feed. This information is provided quarterly and will be closely watched to judge the pace of herd rebuilding and how this may affect the supply of cattle that will be available for placement going into the summer.
Also one final point regarding cattle marketings in March. Analysts on average expect marketings to be down 3.5 per cent from a year ago. This is generally in line with USDA reports which showed that total steer/heifer slaughter during March was 4.3 per cent smaller than a year ago.
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