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Larger Beef Supply Ahead Likely a Bit Bearish

Larger-than-expected March placements hike April 1 cattle on feed inventory above trade expectations; Report may not be as bearish as first glance might suggest.

Published on: Apr 19, 2013

Based on feedlot surveys, USDA estimated cattle on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 10.909 million head on April 1, 2013. The inventory was 5% below April 1, 2012. On average traders expected the inventory to be down about 6.1%.

The larger than expected inventory was driven by larger than expected March placements. USDA estimated March feedlot placements at 1.899 million, 6% above 2012. Traders expected placements to be down 0.9%.

Here's the good news. Placements dropped sharply in February on weather issues and disappointing cash fed cattle prices. While Friday's data suggest larger fed cattle supplies ahead, a strong possibility exists that some of the larger March placements were cattle that otherwise would have been placed in February. Still, the report appears to be a bit bearish on Monday's opens.

Larger-than-expected March placements hike April 1 cattle on feed inventory above trade expectations.
Larger-than-expected March placements hike April 1 cattle on feed inventory above trade expectations.

The on feed inventory included 6.91 million steers and steer calves, down 4% from the previous year. This group accounted for 63% of the total inventory. Heifers and heifer calves accounted for 3.93 million head, down 8% from 2012.

Net placements were 1.82 million head. During March, placements of cattle and calves weighing:

* Less than 600 pounds were 410,000

* 600 to 699 pounds were 315,000

* 700 to 799 pounds were 540,000

* 800 pounds and greater were 634,000.

Marketings of fed cattle during March totaled 1.77 million, 8% below 2012. Traders expected marketings to be down about 6.5%. Lower than expected marketings are also a bit bearish because those cattle are still in feedlots, rather than in coolers or on dinner plates.

Larger Beef Supply Ahead Likely a Bit Bearish

Short beef crop could have a long tail

Monday's markets are likely to rapidly shift back to sizing up beef demand.

In early autumn, the $200 Choice cutout level and $130 cash fed cattle both looked like a mere speed bumps on the way to higher prices. Now both look more like road-closed barriers.

Producers are scratching their heads as to why such once-solid optimism is fading. Markets anticipating the future is likely contributing. An old market maxim says the cure for high prices is high prices.

Looking backwards, drought-induced record-high corn prices last September gave corn users plenty of incentive to buy less. Corn users, including beef producers, looked for all kinds of ways to trim use of the pricey grain. Corn prices began the long-slide lower into what now looks like a typical short-crop, long-tail pattern.

Evidence is mounting that a similar phenomenon is occurring in beef. Some signs suggest trade chatter itself about high prices helped prevent higher prices.

Drought shriveling pastures and crops last year set the trade abuzz with talk of cattle herd liquidation. Combining super-tight beef supplies with higher cattle production costs had everyone projecting record-high fed cattle and wholesale beef prices.

Retailers took note. Neither retailers, nor consumers, like abrupt price hikes. Retailers began easing beef prices higher because "everybody" was "certain" that record-high prices lie just ahead.

Old-man winter refusing to lift his icy blanket made it easy to blame a delayed start to grilling season for lackluster beef movement and failure of prices to ratchet to new highs. However, well-publicized forecasts of record-high prices could just as easily be giving consumers incentives to look elsewhere for meat protein value.

Rising retail beef price make pork, selling at relatively stable retail prices, look like a bargain. Still, retail pork prices remain sticky high, even as faltering pork exports made more pork available to domestic consumers. The result, slipping wholesale pork prices and lower hog prices to producers.

A bigger gross revenue pie is better

High retail beef prices relative to farm prices seem unfair to both front-end beef producers and consumers. However, as long as beef products keep moving through the supply chain, opportunities exist for more of that value to flow back to producers. From a business standpoint, equitably dividing a big revenue pie among those who create value is less challenging than being forced—through price hikes, which can trigger consumer pushback-- to create a bigger pie to divide.

While cattle prices are falling short of expectations, all is not bleak. USDA calculates the annual average farmer's share of the consumer's retail beef dollar advanced from 42.5% in 2009, to 46.4% in 2010, to 49.9% in 2011 to 51.8% last year. It slipped back to 50.3% in 2013's first quarter. Plus prospects for lower prices for 2013 crop feedstuffs improve margins from the cost side.

Consumers do show some resistance to the high prices, primarily by consuming more ground products, which has led to higher prices for ground products relative to steaks and other pricier cuts. Steaks may start to look like a bargain compared to ground products. Moving more steaks would help lift carcass value.

Broilers remain relatively cheap, even though some chicken parts are pricy. Consumers prefer beef. But tight budgets due to a relatively soft U.S. economy could keep some consumers choosing chicken.