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CME: Largest February COF Inventory Since 2012

27 February 2018

US - The 1 February cattle on feed inventory in +1000 head capacity lots was 11.630 million head, 7.9 per cent higher than a year ago, reports Steiner Consulting Group, DLR Division, Inc.

This is the largest February inventory since 2012 when it was 11.8 million head. The difference of this year to 2012, however, is that there are fewer cattle that have been in inventory for more than 120 days.

In February 2012 the +120 day inventory was 3.596 million head compared to 2.984 million head today. The marketing rate today has been faster than it was back then, a function of better demand, allowing feedlots to stay more current.

For instance the marketing rate in January 2012 was 14.9 per cent of the total inventory compared to 16.2 per cent today. In addition, the cattle placed on feed during the fall of 2011 were not as light as what we saw in 2017, which means feedlots have a bit more flexibility as to when/how to market their cattle this time around.

The latest report indicated that feedlots placed 2.068 million cattle on feed during January, 87,000 head (+4.4 per cent) more than a year ago. Prior to the report analysts were expecting placements to be about the same as a year ago.

The placement estimate is always a point of debate and some regional reports already were implying that placements in January were likely higher than expectations. Dry conditions in the Southern Plains have bolstered placement numbers for the last three months and they appear to have contributed to the January increase as well.

Total Texas placements in January were 400,000 head, 11 per cent higher than a year ago and consistent with the indications we getting prior to the report. The bulk of the increase in Texas placements was from cattle weighing less than 700 pounds.

However, placements of light calves in other areas were down, which offset the increase in Texas and surrounding states. The report showed a notable increase (+40,000 head) in the 700-799 pound category and a significant increase in the +900 pound category (+39,000 head).

The increase in overall placements, and especially in placements of heavy cattle, as well as a slowdown in fed cattle marketings last week may be viewed as bearish traders when CME contracts start trading this morning.

Bottom line: On feed supplies are notably larger than a year ago and this should limit beef/cattle price inflation in the spring. However, much of the increase in placements during the last few months was driven by lighter cattle that were forced into feedlots due to drought, which offers feedlots a longer feeding window and more flexibility in marketings.

Futures will likely view the report as moderately bearish due to the larger than expected increase in placements, and more importantly, because there were more heavy cattle placed on feed. The downside risk for the cattle market would come from a slowdown in demand.

So far markets have shown that strong demand trumps larger supplies and thus the focus will continue to remain on demand drivers, be this retail spring features, foodservice traffic trends or export sales.

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