Friday's USDA Cattle on Feed Report points to tighter supplies, but not as tight as traders generally expected in advance of the report. .
Placements in feedlots during January totaled 2.03 million, 9% above 2013. Traders expected roughly a 2.6% hike in placements.
Larger-than-expected January placements pushed the Feb. 1 cattle on feed inventory to 10.760 million head, down 3% from Feb. 1, 2013. Traders expected the on feed inventory to be down about 5.2%.
January marketings, at 1.788 million, were 5% below 2013, not far out of line with the 4.6% reduction traders expected.
Net placements were 1.96 million head. During January, placements of cattle and calves weighing less than 600 pounds were 470,000, 600 to 699 pounds were 440,000, 700 to 799 pounds were 560,000, and 800 pounds and greater were 559,000.
Still, February marks the 17th straight month of smaller year-on-year inventories. That continues to say beef supplies will continue to tighten for the foreseeable future.
So far this year, beef production is down 8.6% with cattle slaughter down 8.5%.That says beef and cattle prices should stay firm to record high, barring any major unexpected demand disruption.
Market striving for new equilibrium
A combination of tight beef supplies and short-bought retailers with advertising features that they needed to fill drove January's beef cutout and cash fed cattle price spike.
Choice cutout surged from just over $200 on Jan. 2 to $240.05 on Jan 22, before skidding back to $208 last week. Now markets are looking for some sort of stability.
Winter storms across a huge swath of the nation disrupted demand for beef. Buying interest should improve with better weather as grilling season nears.
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Squeezed packers have little flexibility to bid up for cattle
Meanwhile, margins continue to adjust with relative winners and losers among the various beef industry sectors. Wholesale boxed beef cutout had the wildest ride.
Unfortunately, packers benefitted only partially from the short-lived price surge because the values represented a limited spot market for wholesale beef and many packers had a significant portion of their beef production forward priced at lower values. The concurrent rise in fed cattle prices has squeezed packer margins because packers are paying the higher fed prices on all cattle they buy, but only a portion of the boxed beef was sold at the high spot prices.
The price spike gave way to an equally dramatic collapse. But packer margins have been further squeezed as boxed beef prices have fallen more than fed cattle prices.
Processors faced more margin pressure Friday when feedlots managed to lever them into paying $145 for live basis cattle, up roughly $3 from the previous week's trade.
Feedlots are among winners
The relative winner in all this is the fed cattle market, where prices have retained more than half of the January gains. Fed prices were about $135 per cwt. the first week of January and dropped to current levels of $145, after peaking at $150 about three weeks ago.
Feedlots are very current at this time as the combination of high prices and winter weather has conspired to pull cattle forward and limit slaughter-ready supplies. A series of winter storms continues to pummel the northern half of the country, which impacts beef demand. Winter weather erodes cattle feeding performance as well.
Feeder cattle remain good property
Feeder cattle markets mostly did not participate in the January surge. The key reason is feeder prices were already at lofty levels. However, the rise in fed cattle prices has made those feeder price levels more sustainable.
Despite record 2013 grain crops, projected world ending stocks remain fairly tight. That leaves corn prices vulnerable to weather. A production disruption somewhere would trim feed supplies and boost feed prices, which would be detrimental to feeder cattle prices.
Replacement heifer demand continues strong. Cull cow and bull markets are strengthening seasonally with reduced supplies and strong hamburger markets. Breaking and Boning cows are pushing $100 per cwt. in many locations with slaughter bulls bringing $110 to $120 per cwt.