Friday's USDA Cattle on Feed Report showed feedlots placed 15% more cattle in February than last year. That's a ways above the average trade guess of up 10%. Traders will likely construe the report as bearish on summer month futures Monday. Still, the on-feed inventory was not far out of line from average trade guesses.
Don't let the February 15% uptick in placements make you think the summer/fall beef supply will rise. The 1% lower March 1 cattle on feed inventory marks the nineteenth straight month the inventory was lower than the same month a year earlier.
Summer cattle futures are near record high. They advanced further after cattle that will come back to the summer market were placed. Those forces should keep feedlots profitable.
Recent feedlot closeouts, said to be well north of $200 a head, give feedlot operators a stash of cash to buy feeder cattle. Feedlot operators are perpetual optimists. Both factors entice feedlots to want to place more cattle.
Feeder cattle available are record low. January 1 feeder cattle supplies outside of feedlots were down 2.3% from a year ago. The January 1 inventory was 2.2% lower than the previous record low set in 2012.
Feeder cattle availability, and prices, could get really interesting this summer. Higher than year-earlier placements in January and February further deplete already record-tight feeder cattle supplies, leaving even fewer feeder cattle available to place later.
Next suppose favorable spring weather lures cow-calf producers to up heifer retention and expand cow herds. Also factor surplus feed lot bunk space into the equation. Feeder cattle prices could spike. They may also be volatile. That all has feedlot managers grappling with how much they can pay for feeders, given expected fed cattle prices down the road that may or may not be as high as current deferred futures prices suggest.
Retreating feed costs, relative to the 2012 short-crop spike, have predictably triggered a surge in feeder cattle prices. Every signal in the cattle market suggests feeder cattle will remain good property for cow-calf producers for the foreseeable future.
Then there's the weather wild card. Crop threats could drive feeding costs higher, which would threaten margins on pricy feeders bought now. Favorable weather could drive feeder cattle prices even higher if better grazing conditions lure cow-calf producers to keep more heifers to expand herds. That seems likely.
Another wild card is exact magnitude of earlier baby losses due to porcine epidemic diarrhea virus. Expectations, or fears, that supplies of market-ready hogs will diminish in the weeks ahead have lifted hog futures prices 16.2% this month. That premium could shrink if actual hog slaughter runs do not drop. Lower priced pork could stiffen competition for beef. PEDV impact could go either way.
Feedlot managers will need to skillfully use price risk management tools to capture a margin with the sizable unknowns that could push costs and revenue fairly dramatically either direction.
Looking at the numbers. From surveys, USDA tallied cattle and calves on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 10.760 million head on March 1, 2014. The inventory was 1% below March 1, 2013, but very close to the average trade guess of 10.738 million.