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CME: Cattle Inventory Bearish for Futures Markets

02 February 2016

US - USDA released on Friday, January 29, the results of its semi annual cattle inventory survey and the results may be viewed as somewhat bearish by futures markets this morning, write Steve Meyer and Len Steiner.

But even as the inventory numbers released by USDA appear to be dramatically higher than pre-report analyst estimates, a couple of things need to be noted.

First, USDA made some very significant revisions to its January 2015 and July 2014 inventory estimates and that skewed to a certain extent the year over year comparisons presented by analysts ahead of the report.

Second, the Urner Barry analyst survey we quoted in our Thursday report only presented a summary from three analysts. It appears to us that futures markets already were notably more bearish than analyst estimates (especially on the back end).

The survey results for the most part confirmed this bearishness. It remains to be seen how futures trade today but we would argue that the market already was preparing for a fairly bearish report, which this was.

Now to the numbers and implications. Total on feed supplies as of January 1, 2016 were estimated at 91.988 million head, 2.845 million head (+3.2 per cent) higher than the previous year.

USDA lowered the year ago inventory number by 657,000 head to 89.143 million.

Without that revision, the January 1 inventory would have shown a 2.4 per cent increase (closer to what some analysts were expecting).

It is important to note that USDA gets a couple of shots at revising this number based on slaughter data. At this point this inventory number is the official statistics and it will drive supply forecasts for the second half of 2016 and 2017.

All categories in the USDA inventory survey showed notable increases compared to a year ago and also compared to pre-report estimates.

One of the key takeaways from the report is that impetus for herd rebuilding remains strong and this is the most significant upturn in the cattle cycle in 20 years.

Heifers retained for beef cow herd replacement were estimated at 6.285 million head, the largest since 1995. A larger portion of the retained heifers is expected to produce a calf this coming spring, helping bolster the 2016 calf crop.

Retained beef cow replacement heifers that are expected to calve were 3.924 million head, compared to 3.712 million head a year ago (+5.7 per cent). The ratio of calving heifers this year is 62.4 per cent compared to 61 per cent last year.

The US beef cow herd has been expanding steadily since 2012-13 when extreme drought conditions decimated the cow herd in the Southern Plains.

USDA estimated the January 1 beef cow herd at 30.331 million head, 3.5 per cent higher than the previous year. The beef cow inventory is up 1.245 million head (+4.3 per cent) from just two years ago and the largest stock since January 2011.

With more heifers retained the forecast is for the beef cow herd to expand further in July and then again in January 2017. As always the key here is feed conditions in key production areas. Above average pastures in 2014 and 2015 have been key factors supporting the beef cow herd expansion.

The increase in the beef cow herd implies a larger calf crop in 2015. The latest USDA survey estimates the 2015 calf crop at 34.302 million head, the largest crop in three years. The crop for 2014 was revised lower so the year/year increase is now 2.3 per cent compared to pre-report estimates looking for a 2.1 per cent increase.

Lower placements of cattle on feed in the second half of 2015 and a larger calf crop implies a notable increase in feeder cattle supplies. Futures markets have been trading that for some time and the latest survey confirmed it.

The January 1 feeder cattle supply is estimated at 25.913 million head (this is net of cows/bulls on feed), 5.3 per cent higher than the previous year and the largest January 1 feeder supply since 2011. Interestingly, the on feed supply as of January 1 was up 1.2 per cent from a year ago compared to the monthly survey of +1000 head capacity feedlots showing 0.5 per cent fewer cattle than last year.

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