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CME: Fed, Feeder Cattle Futures Down Sharply Due to Bearish Implications

25 July 2017

US - There were two key reports released on Friday that directly impact the cattle market and, as of this writing, both fed and feeder cattle futures are down sharply due to the bearish implications of those reports, writes Steiner Consulting Group, DLR Division, Inc.

Cattle on Feed: US on feed cattle supplies continue to expand. The sharp increase in the rate of placements in the last few months indicates that feeder supplies may be a bit larger than earlier thought.

But we also caution readers that one needs to look behind the headline placement number. True placements were larger in May and June but they also skewed light. With the opportunity to lock in profits, feedlots dug deeper into the feeder supply.

Drought in Northern Plains also may have pushed some calves into feedlots earlier than normal. Beef demand remains in good shape but retailers will need to see lower prices in Aug/Sep/Oct in order to book features for the holidays.

Beef cutout has been moving lower and we will likely continue to see downward pressure on the cutout in the near term. Feedlots with a capacity of +1000 head of cattle placed 1.770 million head of cattle on feed in June, 16.1 per cent more than year ago.

Analysts polled prior to the report on average expected placements to be up only 5.9 per cent vs. last year. This is the fourth month of double digit increases in the number of cattle placed on feed.

During Mar-June feedlots have placed some 884,000 head more cattle on feed than during the same period a year ago. By definition those cattle on 1 July had been on feed less than 120 days.

We think the +120 day supply on August may be about 8 per cent less than last year assuming fed slaughter in July will be up about 3.5 per cent compared to last year.

But unless the marketing rate continues to outperform, the + 120 day cattle supply will quickly approach 2016 levels. Steer/heifer weights will be a key item to watch, indicating whether feedlots are falling behind in marketing cattle.

1 July Cattle Inventory: The US cattle industry has recovered quite rapidly in the last three years and the charts illustrate the gains in both the breeding herd and the number of calves coming to market.

The beef cow herd in January was estimated at 31.21 million head, 3.5 per cent larger than the previous year and 6.5 per cent higher than two years ago.

USDA did not conduct a survey last July so we do not have a basis for comparison but for 1 July, 2017 the beef cow herd was estimated at 32.5 million head, 6.6 per cent higher than in 2015.

The July cow herd tends to be larger than the January count because bred heifers are not considered part of the cow herd until they drop a calf in the spring.

The survey also indicated that the dairy herd continues to expand, something that we have seen in the monthly dairy inventory numbers as well.

The dairy herd on 1 July was up 1.1 per cent from two years ago. By far, however, the primary determinant for the increase in cow/beef supplies is the expansion of the beef cow herd.

The larger herd implies a continued increase in the size of the calf crop. USDA estimates the calf crop for 2017 at 36.3 million head, the largest calf crop of the last ten years.

If correct, this would represent a 3.5 per cent increase over the calf crop produced last year and 6.5 per cent higher than two years ago.

The increase in the calf crop provides context to the steady increase in the number of cattle placed on feed.

The feeder supply on 1 July was estimated by USDA at 37 million head, 1.6 million head (+4.5 per cent) larger than it was on 1 July 2015.

Cow herd expansion may be coming to an end, however as beef cow replacement numbers at 4.7 million head were 100,000 head (-2 per cent) less than a year ago.


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