Cattle on Feed Report Market Neutral

Feedlot managers face intense cost/price squeeze.

Published on: Dec 25, 2006

Friday's USDA Cattle on Feed Report should have little impact on post Christmas markets.

Feedlots told USDA they had 2% more cattle on feed Dec. 1 than a year ago. The average trade guess was up 1.9%.

November placements came in at 92% of November 2005. Traders on average expected placements to be 90.6% of a year ago. One concern is placements of cattle weighing more than 700 pounds were up 4%. That may boost March and April fed cattle marketings above previous expectations which would be a tad bearish for spring fed cattle futures.

November marketings were up 6%. That was at the top end of the trade's range of up 1.6% to up 6%, but fairly close to the average expectation of up 4.6%. Strong marketings suggest feedlots are keeping current in response to high feeding costs.

Corn cost crunch

Sharply stronger corn basis in the Southern Plains and higher corn futures prices translate into costs of gain in the upper $0.80 to $0.90 per pound level to finish yearling steers.

"With feeder cattle prices well above a $1 and cost of gain running near or above the current fed steer price, feedlots are barely covering variable costs, if they are," says Len Steiner, Steiner Consulting, Manchester, New Hampshire. "With at least fixed costs lost, the only choice for feeder lot managers is to substantially lower costs or alter production at existing fed cattle prices."

The Texas weekly Choice grading percentage rate has declined from 43% in early September to a spike low in early November of just over 37%. That 6% drop in just over 60 days suggests that feeders are aggressively liquidating fed cattle inventory. Over the same period, percent Choice in Nebraska has generally remained between 58% and 60% indicating that Nebraska feeders have not been under nearly as much pressure to reduce fed cattle numbers.

What are the potential outcomes? First, corn prices and basis could return to more historical levels. Given ethanol- driven corn demand and higher transportation costs, that isn't likely any time soon, especially with growing supplies of ethanol coproduct feeds in the western Corn Belt.

"Second, Southern Plains cattle feeders can seek alternative rations that are more competitive," says Steiner. "But they've already been looking.

"The third option is cattle feeding may start an escalating migration to the North," he says. "The Southern Plains have a weather advantage. The western Corn Belt has a feed cost advantage. Will the feed cost advantage remain large enough to offset inherent weather disadvantages? Time will tell."

Canada marketings up and inventories down

CanFax's monthly estimate of cattle on feed in Alberta and Saskatchewan released Dec. 15 showed November marketings above a year ago and December 1 inventories below last year.

Alberta and Saskatchewan lots held 1.05 million cattle on December 1, 5% or about 53,000 head fewer than last year and roughly 4% lower than the 2000-2004 average. That number is 1% higher than that of December 2002 — before bovine spongiform encephalopathy surfaced in May 2003.

Placements were 33% smaller than last year's record level and 3% lower than the 2000-2004 average. Lower placements and 14% higher marketings drove the inventory lower.