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CME: Feedlots Unlikely to Maintain Current Placement Rate in H2/2017

25 April 2017

US - The latest USDA cattle on feed numbers came in above the average of analyst estimates, which would normally call for a somewhat bearish reaction from futures when they open, reports Steiner Consulting Group, DLR Division, Inc.

Total on feed numbers as of 1 April were pegged at 10.904 million head, 0.5 per cent higher than a year ago and the largest April inventory since 2012. The challenge for the cattle market, however, is that in the very near term supplies of market ready cattle are tight and packers continue to bid up prices in order to fill orders ahead of the start of the grilling season.

The supply of cattle that on 1 April had been on feed for more than 120 days calculates to 3.122 million head, 15.4 per cent less than a year ago. The supply of 150 day cattle is down 40 per cent. This is the largest on feed inventory for the month of April since 2012. But in April 2012 the inventory of 120-day cattle was 4.270 million head, almost 1.2 million head (+37 per cent) higher than it is today.

The bears in the market continue to point out that eventually the higher placements will catch up with the cattle market, maybe in early May... maybe in late May... maybe in June. Those that hold a more bullish view of the market, on the other hand, continue to point to robust beef demand and the fact that packers are sending cattle to market at a rapid clip in order to fill orders.

The rapid pace of marketings combined with light placements in September and October appears to have created a marketing hole that has lifted spot cash prices and created a very wide spread between spot April cattle and June futures. Weather is quickly improving across the country, which is generally good for both retail and foodservice demand.

But let’s look at those March placement numbers a bit more closely since they were indeed quite significant. Cattle placed on feed in March were 2.102 million head, 210,000 head (+11.1 per cent) more than a year ago.

Almost half of the increase was due to more placements of cattle in the 700-799 pound category. Placements of such cattle were up 130,000 head (+26.5 per cent) from a year ago. August futures already hold a notable discount to June and the latest placement data suggest that a big discount for late summer cattle may indeed be warranted.

Placements of heavy and very heavy feeders (+900 lb.) also were higher but the absolute numbers were relatively small, about 17,000 head more than a year ago. But also consider this: In the first three months of this year feedlots have placed 5.777 million head of cattle on feed, almost 400,000 head more than the same period a year ago.

The 1 January feeder cattle supply (i.e. the number of cattle outside feedlots that was available for placement) was 563,000 head larger than the previous year. We appear to have already worked through much of that growth in feeder supplies and 1 April feeder numbers are only modestly higher than they were a year ago.

It appears unlikely that feedlots will be able to maintain the current rate of placements in the second half of the year. One way we could place more cattle on feed later this year is if producers decide to shift heifers scheduled for herd rebuilding into feedlots.

Heifer slaughter is up year over year, but that’s not because producers have decided to stop growing. Rather it is just a function of having a larger calf crop. Heifers placed on feed during Q1 were just 33.7 per cent of all placements, a ratio that is still relatively low (no liquidation yet).

Bottom line, placements are up. There could be some supply pressure for summer/early fall. But also more limited supply growth for late 2017/early 2018.

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