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CME: Bearish Implications of Latest COF Report Shrugged Off

01 February 2018

US - Early futures trading shrugged off the bearish implications of the latest USDA "Cattle on Feed" report, according to Steiner Consulting Group, DLR Division, Inc.

The USDA survey indicated that placements of cattle on feed in +1000 head lots in December were 1.799 million head, 0.8 per cent higher than a year ago. This contrasts with analyst expectations for a 3.1 per cent decline in placements.

However, the higher than expected number may have not come as a surprise as regional surveys already were pointing to higher placements. Looking at the breakdown of placements, the bulk of the increase was due to placements of very light cattle, animals that will likely take until summer to become market ready.

Placements of cattle under 600 pounds were up 35,000 head while placements of animals between 600 and 800 pounds were down 35,000 head. Feedlots placed some 6.291 million head of cattle on feed in the last quarter of 2017. This represented an increase of 492,000 head(+8.5 per cent) from the same period the previous year.

However, almost half of this increase in placements (48.8 per cent) was due to feeders that were under 600 pounds. So even as there are more cattle on feed than the previous year, especially cattle placed in the last three months, these animals will take longer to become market ready and could come to market at slighter weights.

The supply of cattle that have been on feed for over 120 days so far remains near year ago levels, an indication that, at least in the short term, feedlots remain relatively current. According to our estimates the supply of +120day cattle on 1 January was 2.772 million head, 3.5 per cent higher than the previous year but lower than the 2.930 million head that was on feed in January 2016 and 2.836 million head average of the past five years.

In 2012 and 2013, the +120 day supply on 1 January was over 3 million head. The larger supply of cattle on feed will bolster slaughter into the spring. However, robust domestic and export beef demand should help absorb the additional supply and support fed cattle values into the spring.

It continues to be imperative that feedlots maintain the marketing pace, which so far they have been able to accomplish thanks to the improvement in demand. The risk to the downside will come if fed cattle prices run up ahead of fundamentals and negatively impact retail beef features for the spring.

Fed cattle weights in the last two weeks have held steady when normally they come down. A slowdown in fed cattle slaughter could cause those weights to follow the path of 2016. The big difference to that year, however, is that feedlots are more current. That is a situation that they would do well to maintain.

The report also provided an update on the inventory of steers and heifers during the last quarter of the year. According to USDA the inventory of steers on 1 January was 7.335 million head, 313,000 head (+4.5 per cent) higher than a year ago. The inventory of heifers on feed was 4.154 million head, 571,000 head (+15.9) higher than a year ago.

The ratio of heifers to the total inventory currently stands at 36 per cent. The shift in the heifer ratio implies that producers have significantly slowed down herd rebuilding but the ratio still is quite a bit lower than in liquidation years.


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


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