Updated: February 2015 USDA Cattle on Feed Report recap

Key numbers in the January, 2015, USDA Cattle on Feed Report came in on the friendly side of trade expectations. Still, with fed cattle ending locked limit down on Friday, futures are likely to start lower on Monday. The reason is overwhelming pessimism that persisted in late week markets.

From feedlot surveys, USDA estimated cattle on feed in feedlots with capacity of 1,000 or more head totaled 10.690 million head on Jan. 1, 2015. The inventory was 1% above Jan. 1, 2014. The Jan. 1 inventory was about 300,000 below the average of trade expectations. The inventory included 6.94 million steers and steer calves, up 2% from the previous year. This group accounted for 65% of the total inventory. Heifers and heifer calves accounted for 3.67 million head, down 2% from 2014. Fewer heifers on feed provide more evidence that cow-calf producers are holding heifers to expand breeding herds.

Placements in feedlots during December totaled 1.544 million, 8% below 2013. Feedlots placed about 63,000 fewer cattle than traders expected. Net placements were 1.47 million head.

Both placements and cattle on feed are on the market friendly side of expectations.

During December, placements of cattle and calves weighing less than 600 pounds were 435,000, 600-699 pounds were 375,000, 700-799 pounds were 339,000 and 800 pounds and greater were 395,000.

Marketings of fed cattle during December totaled 1.655 million. While 5% below 2013, December marketings were only 8,000 or so less than the trade expected. It's hard to construe that difference as bearish.

Other disappearance totaled 72,000 during December, 6% below 2013. Trade chatter had been hinting that some cows were in feedlots, while biding time on their way back to the cow herd. The down tick in other disappearance does not support that notion.

Market sentiment turns sour. Things had been going really well in cattle markets. Cattle started 2015 even higher than they launched 2014.

When things are not going so well watch out and when things are going well, watch out more. Now is the time to watch out more in the cattle market, especially on demand.

A series of droughts crippled beef production, creating a supply shortage. That combination pushed fed cattle, feeder cattle and beef prices to record highs in 2014.

Record prices give producers ample incentive to expand. Jan. 1 beef replacement heifer inventories suggest cow calf producers have been trying to expand for three years. For various reasons—drought, lack of grazing, opportunity cost of not sending the heifer to a feed yard—producers have aborted those expansions.

Record prices also give consumers incentive to consider buying something else.

Watch out for competitors. Cattle's lengthy biological cycle means beef cannot expand production rapidly. But hogs can. Chicken can crank up even faster. Both are.

Pricy beef gives both species ample incentive to expand. Hog producers got even more incentive when prices surged as porcine epidemic diarrhea virus threatened to spike baby pig death losses. PEDV eventually proved to be more hype than actual loss. But it still pushed the 2014 annual average hog price 19% above 2013.

Pork producers responded to those high prices. They are ramping up production. More hogs coming to market at heavier weights have pressured hog prices. By late January, the national base hog price was the lowest for January since 2010.

USDA projects 2015 broiler production up about 3% from last year. Trade chatter suggests higher broiler slaughter weights could boost production even more.

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Consumers hold key. The record-wide price spreads of beef vs. pork and chicken entice consumers to look at pork.

The strong U.S. dollar makes U.S. beef more expensive in world markets. Easing exports could put more beef on the domestic market. More beef could let prices slip.

Oklahoma State University's January Food Demand Survey shows consumers' willingness to pay (WTP) for all meat products remains higher than a year ago. However, WTP for all beef and pork products dipped from December 2014. WTP for chicken products rose. WTP for steak and hamburger both fell by around 7% and deli ham WTP decreased almost 10% from December.

China's economic growth is slowing. Europe is struggling. When fears about slow global growth surface, money tends to flow out away from the long side of commodity markets. Longs eased up on oil. Longs liquidating cattle futures had cattle futures and cash cattle prices going opposite directions early this month. Such uncertainties spell volatility which could let beef prices tumble, even if beef demand holds firm.

Record high feeder cattle prices have driven beef cow and replacement heifer prices record high. Record high costs spell record risk if prices tumble. As with riding a tiger, the most challenging part is figuring out how to get off.

From the consumer standpoint, beef lovers are certain to keep eating beef. However, the record-wide price premium of beef over pork and chicken may well push some more thinly capitalized consumers to pork or chicken. Fortunately, lower gasoline prices should ease some of the cash flow pressure on consumers.

One demand indicator. An acquaintance used to buy T-bone steaks in pairs, one for his wife, one for himself. Now he buys singles and they spilt it.

"Funny thing," he notes. "We've not lost any weight. Could be because we're doing it more often."