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CME: Drought Pressure Minimal for Much of US

21 June 2019

US - Drought pressure appears to be minimal for much of the country at this time and, combined with good moisture conditions earlier in the spring, it has resulted in one of the best pasture conditions of the last 25 years, according to Steiner Consulting Group, DLR Division, Inc.

Each week USDA-NASS publishes the results of a national survey of crop conditions, including conditions across pastures and ranges. For the week ending 16 June, USDA reported that 56 percent of the pastures and ranges across the country were in good condition and another 15 percent were in excellent condition.

Last year, only 48 percent of pastures and ranges were in good/excellent condition, 23 points lower than this year. Alternatively, just one percent of pastures, mostly in California, were rated to be in poor condition. The chart below shows both the best and worst rated years for the last 25 years, outlining the range of conditions during the last two and a half decades.

So far this year we are tracking pretty close to the high end of the range (1995). The year that appears most comparable to current conditions in terms of pasture ratings is 2010. For cattle market participants, the combination of forward price risk for livestock feed, especially corn and excellent near term pasture conditions present some interesting questions.

High forward feed costs directly impact the price feedlots are willing/able to pay for calves during the summer and fall. Higher cost of gain in the feedlot and plentiful grass make it economically desirable to try and add as much weight on calves as possible outside the feedlot, potentially resulting in a slowdown of placements in the short term and calves placed at heavier weights down the road. The net effect could be a slowdown in the cattle flow and lower slaughter rate.

But just because pasture conditions are excellent does not always mean a significant shift in the rate of placements, there are plenty of other factors that will impact placements. The chart below looks to illustrate the generate trend in placements during the year by taking the monthly placements as a share of total placements for the year.

Naturally the lowest placements for the year take place during June and July as more calves are spending time in pastures and ranges, limiting the number going into feedlots. All the gray lines represent performance during the past 25 years, basically illustrating the seasonal tendency. However, we outlined the three years that had the best pasture conditions during Jun/Jul/Aug and the share of monthly placements vs. the annual average during that time.

In 2010, the placement rate during the first half of the year was relatively low, resulting in more feeders available for placement during Aug/Sep. On the other hand, in 2015 and 2016, relatively higher placements earlier in the year and good pasture conditions limited the number of cattle placed during summer and fall months.

The difference between those years and today is that there was significantly less corn price risk. Should we expect a significant shortfall in placements in the short to medium term? It is possible but other factors play a role, especially the long run outlook for fed cattle going forward.

If the rise in feed costs is not accompanied by a notable increase in future fed cattle prices, then the cow-calf producer will get squeezed, resulting in more heifers going to market and thus adding to the number of cattle placed on feed. Already it appears that herd expansion has come to an end. Without a significant material improvement in returns for 2020 (via higher future fed cattle values), higher feed costs may accelerate cow herd liquidation.


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