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CME: Feedlots Becoming More Current

22 March 2016

US - Futures markets participants will likely view the latest feedlot inventory survey as neutral for prices this spring and summer - the USDA results were for the most part in line with pre-report expectations, write Steve Meyer and Len Steiner.

Coming into the report analysts agreed that feedlots placed more cattle on feed in February than a year ago.

February this year had one additional day so there was some uncertainty as to how much that would skew the results but overall it appears that analysts had accounted for the anomaly in their projections.

On average analysts expected placements to be 9 per cent higher than a year ago while the USDA survey showed placements up by 10.3 per cent.

The difference from estimates was a mere 15,000 head, which should not have much of an impact in terms of supply projections for the summer months.

Placements are expected to continue to increase in March, April and May, which should bolster the supply of cattle available for marketing in the fall and early winter months.

Futures already are pricing a significant discount for late summer and fall and the modest, which reflects in part uncertainty about demand this spring and market ability to absorb a material increase in beef supply, especially as we move deeper into the hot summer months.

Lower prices for competing meats also remains a key factor for beef prices. Marketings in February were up 4.9 per cent compared to a year ago, largely reflecting the one extra marketing day compared to a year ago.

Once we adjust for the additional day, marketings this year were similar to a year ago. Total cattle supplies as of March 1 were 0.8 per cent higher than a year ago. The supply of cattle that at the start of the month had been on feed for more than 120 days was up 3.4 per cent from a year ago.

The growth in the supply of market ready cattle has slowed down, indicating feedlots are becoming more current. Still, as the second chart shows, the inventory of cattle that as of March 1 had been on feed for more than 120 days remains both above year ago levels and also above the five year average.

The challenge for feedlots going forward is that over the last few years packers have adjusted their slaughter schedule to accommodate a smaller kill.

We estimate that average daily steer and heifer slaughter in February was around 84,500 head, 0.5 per cent higher than a year ago but 7.3 per cent lower than the five year average.

Slaughter is expected to improve modestly in March to around 86,200 head, 2.2 per cent more than a year ago but still 7.8 per cent lower than the five year average.

Are slaughter numbers going to ramp up significantly in April and May so as to catch up with the inventory of market ready cattle? Last year averaged daily slaughter briefly peaked at 95,000 head in May before collapsing over the summer.

The net effect was significant increase in the supply of overfinished cattle and thus big discounts for cattle traded in the fall and winter.

At this point fed slaughter needs to be above 95,000 head in April and stay near 100,000 head in May, June and July in order to keep feedlots current. The expected increase in slaughter is driving the wide spreads between spring, summer and fall spreads.

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

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