Smaller Cattle on Feed Inventory Says Beef Supplies Will Stay Tight

Larger-than-generally expected January placements boost Feb. 1 on-feed inventory above expectations, which is bearish for fed cattle trade Monday.

Published on: Feb 21, 2014

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.