Feeder cattle supplies tighter than expected
USDA’s August cattle on feed report showing placements into feedlots during July were more than 10 percent below a year ago surprised even analysts who follow cattle markets closely.
There was a wide range of expectations on how much lower placements would be, but the actual number was even lower than the lowest expectations, said Derrell Peel, livestock market economist with the University of Oklahoma.
“That placements were lower is no surprise given the Jan 1 inventory of feeder cattle. But the magnitude of the decline – 10.4 percent versus last year – is a bit of a shock, especially given analysts’ average prediction was for a reduction of only 2.5 percent,” editors of the Daily Livestock Report stated.
In addition, marketings were strong, up 5 percent from July 2012, and the inventory on feed on Aug. 1 was down a full 6 percent, Peel said.
There are about 180,000 fewer cattle in U.S. feedlots than analysts had expected on Aug. 1. The number of cattle on feed for 120 days or more now numbers just 3.211 million, 14.9 percent fewer than a year ago, according to the Daily Livestock Report.
The report was a peek at what’s to come, a continued squeeze on feedlot inventories and tighter feeder cattle supplies ahead, Peel said.
Cattle on feed has been lower year over year for 12 months in a row, placements in July were a five-year low for the month, and the August on feed number is the lowest since August 2010.
The industry can expect lower placements to continue with the feeder cattle supply reaching its lowest level in 2015 and into 2016, Peel said.
Cattle supplies have been declining for two to three years, with cow/calf producers unable to start rebuilding the herd due to drought. The industry’s been able to get by, but at some point it was bound to reach a critical point, said John Nalivka, owner of Sterling Marketing, a Vale, Ore., consulting firm for the red meat industry.
Associated problems with droughts in 2011 and 2012 reduced the calf crop and sent more cows than usual to slaughter and potential replacement heifers to feedlots, he said.
Tighter feeder cattle supplies are bad news for feedlot operators, who have been operating at a loss for 15 to 16 months. Margins have improved significantly since spring, but last week they were still losing about $60 a head and feeder cattle prices have been on the rise for 13 weeks, he said.
Feeder cattle prices in the Southern Plains are up $20 to $24 a hundredweight since May, reflecting tightening feeder cattle supplies as well as expected lower corn prices and better forage conditions that have people looking for calves to graze, Peel said.
Feedlots had gotten breakeven down to the low $120s per hundredweight last spring but have added $10 back onto that. Anything they gained in anticipated lower feed costs, they’re giving back in higher feeder cattle prices, Nalivka said.
Both the spot price and August futures price on the CME for fed cattle going to packers are about $123 per hundredweight.
Packers have also had their share of negative margins, although they are currently in the black about $20 a head. What has to be resolved and will be resolved in the industry is overcapacity in the feedlot and processing segments relative to the number of cattle, Nalivka said.
The average utilization of capacity at the feedlot level in 2012 was 66 percent, and it’s continuing a decline to 50 percent. U.S. feedlots have a one-time capacity for a total of 17 million head, and cattle on feed on Aug 1 was only 10 million, he said.
Feedlots can do that for a while, filling in the holes with custom feeding and owning some of the cattle, but overcapacity will increasingly be a burden on the industry, he said.
While the situation is a bad deal for feedlots and packers, it puts cow/calf producers in the driver’s seat, Peel said.
“It’s all about supply. The profit opportunity is quite strong and looks to get stronger,” he said.
Nalivka agrees, saying a $200 per head positive margin in the cow/calf sector is not asking for the world, given the situation.