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Traders Might Find Cattle on Feed Report Bearish

April placements of cattle on feed up 15%; May 1 cattle on feed inventory down 3%.

Published on: May 17, 2013

Some grain farmers will look at the 15% surge in April 2013 placements of cattle into feedlots over April 2012 placements and conclude: 1) Feedlot demand for corn will rise sharply; and 2) T-bone steaks will get cheaper.

Unfortunately, no big surge in corn demand from cattle is coming. The key reason is that the total U.S. beef herd is still shrinking.

T-bone steaks could get cheaper. But only if:

*Retailers and restaurants succeed in passing the full impact of current record-high wholesale beef cutout values on to consumers.

*Cash fed cattle prices and cutouts follow their normal seasonal pattern and drift lower into summer.

*Retailers pass those subsequent reductions on to consumers.

April placements of cattle on feed up 15%; May 1 cattle on feed inventory down 3%.
April placements of cattle on feed up 15%; May 1 cattle on feed inventory down 3%.

We doubt that retailers are able to pass current record-high wholesale prices on to consumers. Here's one observation why.

Much to my surprise, a competitor of my favorite retail meat counter featured T-bones this week on the door step of Memorial Day grilling at $5.99 a pound. That suggests to me retailers have yet to factor the record high cutouts into retail prices.

Through Thursday afternoon, Choice cutout had marked six record highs over the previous ten days, advancing from $190.78 on April 22 to $208.77 Thursday afternoon. Odds are good that the week's records will stand for a while. That's because beef prices tend to ease lower once buying for Memorial Day grilling winds down.

Grilling season could stretch. Due to old-man winter's refusal to let loose his icy grip until deep into spring, a possibility exists that prime grilling season may extend deeper into June than normal. That could support wholesale beef prices longer than normal, which would also support cash fed cattle prices longer than normal.

June live cattle futures, which closed Friday at $119.40, are at roughly a $5.50 discount to the week's cash trade, the bulk of which occurred at $125.

If strength in cash fed cattle prices holds, June futures will rise to narrow the cash futures spread. Currently, futures traders are betting that cash prices will erode toward the futures level before June fed cattle become deliverable and the two prices must converge.

Looking at the numbers USDA tallied April placements at 1.75 million head, up 15% from April 2012. The figure is well within the range of trade guesses from up 4.9% to up 22%. It's a tad above the average trade guess of up 12.1%, which traders may construe as a bit negative.

Do not think the higher placements point to a significant surge in beef supply come fall. Why? April 2012 placements were the smallest since 2002 and down 15% from 2011. Compared to those figures, April 2013 placements will look like a surge.

Lower feeder cattle prices provided a bit of stimulus to place cattle in April. April 2012 feeder cattle prices averaged about $136.65, down sharply from $145.35 for the January-February period and a bit lower than the March average. The biggest incentive for feed yards to place more cattle was the significant drop in corn prices that occurred at the end of March and beginning of April.

Net placements were 1.68 million head. During April, placements of cattle and calves weighing less than 600 pounds were 375,000, 600 to 699 pounds were 270,000, and 700 to 799 pounds were 455,000 and 800 pounds and greater were 650,000.

Cattle and calves on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 10.7 million head on May 1, 2013. The inventory was 3% below May 1, 2012 and the smallest May 1 inventory since 2010. On average traders expected May 1 cattle on feed to be down 3.7%. The range of the estimates was from 95.0% to 98.0% of last year's number. Traders might construe the smaller-than-expected inventory as a bit friendly.

Marketings of fed cattle during April totaled 1.86 million, 2% above 2012, a bit less than the average trade guess of up 2.9%. However, April 2013 had one more day compared with 2012, which put daily average marketings nearly 1% below a year before.

Traders Might Find Cattle on Feed Report Bearish