First quarter rally likely
Last year, cattle futures rallied sharply at the end of the year on expectations that high feed costs would negatively impact cattle performance and reduce the supply of beef coming to market. However, wide spread use of beta agonists, including Zilmax, boosted feed conversion rates preventing a sharp first quarter supply reduction. Cattle prices corrected lower.
This year significantly fewer cattle are on feed going into winter. Zilmax is basically gone. Feed costs are much lower, but that may not matter if cattle are not available to feed. The recent spike in feeder cattle prices was a reminder that feeder cattle supplies remain tight.
Feeder cattle will hold good value
Feeder cattle and calf supplies will likely keep tightening. Once a quarter USDA asks respondents for the Cattle on Feed Report to provide data on heifers in feedlots.
On Oct. 1, feedlots with 1,000 or more head capacity reported having 6.442 million steers on feed and 3.662 million heifers on feed. Heifers comprised 36.2% of the feedlot steer and heifer population. That's actually up from 35.4% last year, 36.0% in 2011 but below 36.8% in 2010.
Many analysts, including ourselves, expected heifers to represent a smaller share of the on-feed inventory. The logic: strong returns to beef and respectable returns to dairy encourage producers to expand both the beef and dairy herds. Apparently, the lure of pricy feeder cattle has enticed cow-calf producers to let feedlots have heifers and stash their cash in the bank.
Still, the shrinking on feed inventory and producers eventually retaining heifers for herd expansion and keeping more of their best cows, rather than culling them, will further tighten number of cattle coming to slaughter.