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CME: Slightly Bearish Outlook from USDA Report

28 April 2015

US - The USDA's recent Cattle On Feed report gives a moderately bearish outlook for the market, write Steve Meyer and Len Steiner.

The monthly report was the same song and pretty much the same verse: Big feeder cattle, low placement numbers, even lower marketings and tight, tight inventories. Okay, it would be a bad song but it still makes for interesting times in the beef trade. The key numbers appear in the graphs.  Some highlights of Friday’s report are:

  • The report is being viewed as mildly to moderately bearish for trade this morning given that each of the key figures is larger than both one year ago and the respective average of analysts pre-report estimates. The is especially true for placements which came in nearly 5 per cent higher than anticipated, meaning fed cattle supplies in September and October will be larger than originally anticipated. We would expect some pressure on fall Live Cattle futures.

  • Placements were much closer to their five-year average level than had been anticipated. The 1.809 million put into yards in April was slightly larger than one year ago, only the second time in the past 13 months that that has happened. We suspect that this line will continue to be included in future discussions of the Cattle On Feed report as feeder cattle supplies are still very tight and the cow herd is still being rebuilt through higher heifer retention.

  • The 10.797 million head of cattle in lots with capacities of 1000 head and more (which are the target of this survey and report) was just 5000 head higher than one year ago but still marks the 16th straight month in which inventories have been very close to their 5 year low.    

  • March placements continued to skew heavy. The average weight of cattle placed in March was 734.2 pounds, over 13 pounds heavier than one year ago and 7.7 pounds heavier than last month. The average was pushed higher by a 16 per cent increase in the number of cattle weighing 800 ponds and over and a 14.1 per cent decrease in cattle weighing under 600 pounds. This is a recurring theme in recent months that will likely have the effect of widening the spread between summer and fall/winter futures. These placements of cattle at heavier weights will continue to drive heavy market weights.

  • Marketings continue to lag year-ago levels — just as expected — in March. This is also a continuing trend. The number of cattle that have been on feed 120 days or more as of April 1 was 11.1 per cent higher than last year. That’s the third straight month that that figure has been above 10 per cent and the two months before that string saw this “long-fed” supply 9.4 and 9.9 per cent higher than last year. We continue to believe that there will be some short-term pressure on feedlots to sell some heavy, long-fed cattle but there is an alternative theory on this matter. Some analysts believe that weights and the supply of these long-fed cattle is the result of Holstein cattle representing a larger-than-normal proportion of the COF inventory due primarily to tight supplies of “beef” breed feeders. Feedlots’ success at holding the line on price for the past few months has already surprised us a bit and added some credence to this alternative view. We’ll see how that plays out over the rest of the spring and into summer. Who will blink first? Lots or packers?

Bottom Line: A seasonal increase in beef supplies is still in the cards and heavy-placed cattle should help summer supplies. Putting weight on cattle outside of feedlots is slowing the flow of cattle and still restricting an already-tight beef supply situation. There is not much of a premium in fall and winter months, implying considerable upside price risk.

Further Reading

You can view the report by clicking here.

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