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CME: Latest COF Inventory Data Likely to be Viewed as Bullish

22 October 2018

US - Futures market participants will likely view the latest cattle on feed inventory data as bullish for the late winter/early spring market, reports Steiner Consulting Group, DLR Division, Inc.

While USDA in January and July offers an estimate as to the supply of cattle outside of feedlots, the flow of feeders into feedlots and ultimately slaughter provide the true measure of supply availability. Prior to the report analysts were split in their expectations for September placements.

Seasonally placements increase in September but it appears that feedlots pulled some of the feeder supply forward by increasing placements in July and August. Total cattle placed on feed in July and August were up 269k head compared to a year ago but they were down almost 100k head in September.

Looking at the structure of placements, most of the decline in September came from two categories. Placements of cattle weighing between 700-799 cattle were down 60k head and placements of cattle over 800 pounds were down 49k head. Contrast this with placements in July and August.

During those two months, placements of cattle under 600 pounds rose by 120k head, placements of 600-699 cattle were up 105k head, and placements of cattle 700-799 pounds were 72k head higher than a year ago.

Poor feeding conditions in some parts of the country possibly limited the ability of producers to add weight to feeders outside feedlots and accelerated the flow into feedlots. Indeed, producers continued to place more light cattle on feed in September.

One corollary of the trend of placing cattle on feed at lighter weights is that it makes it more difficult to maintain the historical trend of ever increasing average carcass weights at slaughter. In the last three years, the peak in annual steer weights has been consistently lower than the year before.

Futures already have priced February and April cattle contracts at a notable premium to December. It appears that lower placements in the above mentioned weight categories combined with seasonal weather risk may continue to support these spreads for the moment.

Four times a year, USDA also offers a breakdown of the on feed inventory by sex. The latest data showed the inventory of heifers and heifer calves on 1 October was 11 per cent higher than a year ago while steer inventories were up 2.3 per cent.

Reduced profitability has caused producers to retain fewer heifers than a year ago, bolstering on feed supplies. The chart below shows the ratio of heifer placements relative to total placements. The ratio has increased steadily and it is currently near the levels we observed in 2009 and 2010, when producers actually started to deplete the breeding herd.

It is still early to say liquidation is going on but a continued increase in cow slaughter and more heifers going into feedlots ultimately may result in a net reduction of the cow herd. We don’t expect to see this in the January 2019 count but it appears more likely in January 2020.

Lower than expected placements caused the total number of cattle on feed to be quite a bit lower than what analysts expected (105.4 vs. 106.3). However, the front end supply remains well above year ago levels and, in the short term, this may continue to limit the upside for cash fed cattle prices.

The supply of cattle that have been on feed for more than 150 days is estimated at 1.921 million head, 27.1 per cent higher than a year ago. The supply of cattle that have been on feed for more than 120 days is estimated at 3.972 million head, higher than it was on 1 September and 11.5 per cent higher than a year ago.

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

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