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CME: Market Reaction to Cattle Report Quite Interesting.

06 February 2015

US - The market reaction to Friday’s Cattle report has been quite interesting. The report was bearish indeed but was it this bearish for the short term? write Steve Meyer and Len Steiner.

We include today the comments by one of the foremost observers and analysts of the beef industry in general and the cow-calf sector in particular, Dr Derrell Peel of Oklahoma State University.  

He is a regular contributor to Oklahoma State Beef Extensions Cow-Calf Corner newsletter, a great information source for both production information (provided by Dr Glen Selk) and market analysis.  If you need to know more about this sector, we highly recommend Cow-Calf Corner.   

Dr Peel’s take on the report includes the following:

  • The inventory of all cattle and calves was 89.8 million head on January 1, 2015 is, except for last year, still the smallest total herd inventory since 1952.   

  • The 2014 calf crop, at 33.9 million head implied a crop percentage (calf crop as a percent of all cows) was 88.5 per cent, the highest percentage since 2006.   

  • The estimated supply of feeder cattle outside feedlots was up 0.5 per cent as a result of  one percent increases in the inventory of steers, 500 pounds and over and calves, under 500 pounds; along with a slight decrease in the inventory of other heifers.  Our note:  These feeder cattle supply numbers, though larger than last year, are still incredibly tight!  Note at right that they have been within the range of 25.175 million and 25.586 million for the past four years.  The average of those four years (25.367 million) is nearly eight per cent lower than the average for 2004 through 2010 — the years of the last “plateau” of feeder cattle numbers.   

  • Though beef cow herd expansion was anticipated, the 2.1 per cent in? crease was a larger than expected.  The largest increases were in Texas, at 107 per cent of last year; and Oklahoma, up six per cent from one year ago.   These two states —which are normally the two largest beef cow states — accounted for 62 per cent of the total increase in the beef cow herd. Kansas and Missouri each accounted for about 10 per cent of the cow herd increase meaning that those four states accounted for 82 per cent of the total increase in beef cows.  The increase in Texas beef cow inventory was higher than most people expected because, despite improved conditions, significant areas of drought remain in the state.    That is especially true of west Texas near the base of the Panhandle.

  • Another surprising data item was  California beef cow inventories that were unchanged relative to January 1, 2014 despite the severe drought that has plagued the state this past year.  The same is true for Oregon, which also experienced significant drought but had a 1.7 per cent increase in the beef cow herd in the state.   

  • The lack of growth in the Northern Plains was also somewhat surprising given much better pasture conditions and lower feed costs.  The beef cow herd declined in both North and South Dakota and was unchanged from one year ago in Nebraska.   

  • The four per cent year over year growth of the number of beef heifers held   as replacements indicates that further expansion is planned on the part of cow calf producers.  January 1 beef replacement heifers, as a percent of the beef cow herd was a record 19.5 per cent, indicating intensive heifer retention. Moreover, the calculated percent of heifers entering the herd in 2014 jumped 23 per cent year over year; with those heifers entering the herd representing 96 per cent of NASS reported heifers expected to calve in 2014.   

  • Oklahoma led the growth rate for beef heifers at 25 per cent, year-on-year.  The state’s 80,000 added heifers accounted for 35 per cent of the total national increase in replacement heifer numbers.  The beef replacement heifer increases of eight per cent in Texas and 12 percent in South Dakota, were the second and third largest increases in absolute numbers and, when combined with Oklahoma, represent 75 per cent of the total increase in beef replacement heifers.  Kansas also had an eight per cent year over year increase in beef replacement heifers.   

And Dr Peel’s conclusion regarding market impacts:

“This report does not change market fundamentals much, if any, in 2015.   The fact that there are more cows than expected does not change the timing of beef production in 2015.   The marginal increase in estimated feeder [cattle numbers] provides little relief to tight feeder numbers and may be offset with even more heifer retention and the possibility of smaller feeder cattle imports from Mexico and Canada this year.  The jump-start to herd expansion could shave a year off of the time needed for herd rebuilding, depending on herd expansion in 2015 and beyond.  In any event, herd expansion is expected to continue until late in the decade baring setbacks from drought.”

It appears that Dr Peel sees longer-term bearish impacts from a growing cow herd but agrees with us that the report did not change much for 2015-except, apparently, the psychology of market participants?

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