USDA Cattle on Feed Report: Inventories up slightly; supply stays tight

USDA Cattle on Feed Report: Inventories up slightly; supply stays tight

USDA Cattle on Feed report numbers are on bearish side of neutral; report unlikely to move prices

Update: See the March 2015 Cattle on Feed Report recap

From feedlot surveys, USDA cattle on feed report as of Feb. 1 showed 10.711 million head on feed up from the 10.640 million head average trade guess among analysts responding to an Urner Barry survey earlier in the week. The inventory was up a fraction of a percent from last year.

January placements came in at 1.787 million head, slightly above the 1.751 million average trade guess and 89% of the January 2014 placement value.

January marketings of 1.625 million head are slightly below the 1.631 million average trade guess and 91% of January 2014 marketings.

Cattle on Feed numbers are on bearish side of neutral; report unlikely to move prices

The USDA Cattle on Feed report confirms that beef supply will remain tight. That is not fresh news.

Market will likely remain volatile. Over recent weeks, the market has shifted more to concerns about strength of demand, rising supplies of competing meats, export and import issues and fading bullish psychology in livestock markets.

Logic suggests that cattle and beef will struggle to stay well above their five-year averages when hogs and pork are near four and five year lows. At some point, pork and poultry will look cheap to consumers relative to beef. Consumers will step up buying of competing meats. How retailers (and restaurants) choose to manage margins on various components of the meat case will help guide when and rate at which that shift occurs.

Consumers may be getting a break on beef if retailers can keep margins on pork and poultry favorable to keep margins on beef tight.

Softening futures are concerning. "Last fall saw plenty of euphoria in the cattle markets," notes Altin Kalo, Steiner Consulting Group, Manchester, N.H. "Market participants chased feeder cattle values to all time record levels.

"That euphoria has now been replaced with a realization that maybe the fed cattle values required to justify those lofty feeder cattle purchase prices are impossible to attain in a deflationary commodity environment," he adds. "We're realizing that we have more pork and chicken than we know what to do with. The strong dollar is keeping prices high for our export customers and high retail beef prices are slowing domestic consumption.

"Futures markets are currently in the process of re-pricing forward fed and feeder cattle in light of the changing demand picture," notes Kalo. "In the very short term, exports remain a key wild card. A better assessment of domestic demand will be possible in April and May, once grilling season starts."

Futures markets are forward looking. That's why futures weakness is so concerning for beef producers.

Herd expansion pace could slow. The beef industry remains in expansion mode. The main challenge to expansion remains feed availability this coming spring and summer. Last year provided excellent pasture conditions, which helped support heifer retention and reduced cull cow availability.

Feeder prices dropped sharply in January as feedlots were reluctant buyers due to very high projected breakeven values for cattle being offered. That demonstrates the fragile nature of cattle markets at lofty prices.

Feedlots tie up a lot more dollars per head in feeder cattle than they did before the price surge. That spells more leverage and more financial risk. Rising risk will keep feedlots, and their lenders, on edge for the foreseeable future.

USDA Cattle On Feed Report for February 2015:

USDA reports cattle on feed up slightly; supply stays tight

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