Cattle on Feed & Cattle Inventory Reports

Slaughter cattle prices rebounded nicely last week to the $125/cwt area following some weakness earlier this month.  The feeder cattle market, though, has been especially strong thus far in 2012.  Average prices for 500-600 lb. steer calves in South Dakota have approached $180/cwt while yearling weight (700-800 lb.) steer prices surpassed $150/cwt.  These prices are more than $30/cwt and $26/cwt, respectively, higher than feeder prices last January. 

Relatively small supplies, coupled with strong demand for feeder cattle, have spurred the growth in feeder cattle prices.  Back in July, USDA estimated the 2011 U.S. calf crop to be 35.5 million head, about 185,000 head smaller than 2010 and one of the smallest in history.  In this week’s annual cattle inventory report, USDA will likely reduce the 2011 calf crop by another 135,000 head.  That annual inventory report will provide state level breakdowns in addition to national totals.  While it is likely that South Dakota’s calf crop has not declined as rapidly as the national average, state calf supplies are still expected to be lower as of the beginning of the year. 

Demand for feeder cattle has also been strong in spite of high corn prices due to excess capacity in commercial cattle feedyards.  Current estimates of capacity won’t be available until mid-February, but last year at this time it appeared that only about 70% of bunk space was being utilized in U.S. feedyards with more than 1,000 head capacities.  The recent feeder cattle demand in South Dakota was evident in aggressive placements last fall as calves came to market.  State-level placements from September through November were almost 3% higher than the same time period a year ago, while nationally placements were steady in those three months.  In December, South Dakota feeder cattle placements fell by 18% compared to December 2010 whereas placements nationally averaged only 6% lower, thus suggesting that local calve supplies were growing tighter.

The USDA Cattle on Feed report released last Friday indicated that gross placements of cattle on feed in December were 1.683 million head, almost 6% less than December 2010 and consistent with pre-release expectations.  December 2011 also saw much larger “other disappearance” (i.e., mostly transfers between feedyards), so net placements (defined as gross placements minus other disappearance) was actually 8% lower than in December 2010 and the largest year-over-year percentage decline since May.  Given the aggressive drought-induced placements in the second half of 2011 in Texas and Oklahoma, it wasn’t surprising to have a decline in December placements.  And, as supplies of available feeder cattle grow increasingly tight, it is a trend that is likely to continue over the next several months.  In fact, the continued “pulling ahead” of feeder cattle into feedyards was again evident in last week’s Cattle on Feed report that showed placements of calves weighing less than 600 lbs. up 16% compared to December 2010.  Overall, the 6% decline in gross placements was a result of nearly a 20% decline in placements weighing between 600 and 800 lbs.

Cattle feeders’ struggle to keep their pens full is also demonstrated by feeding a larger proportion of heifers.  As of January 1, 2011, 37.9% of the cattle on feed in the U.S. were heifers, the highest that percentage has been for January since 2004.  This is noteworthy as there is growing competition for heifers from cow-calf operators considering replacements.

In addition to the somewhat favorable placements data, last Friday’s Cattle on Feed report indicated that December 2011 marketings were 1.796 million head.  While the trade was expecting about a 3% decline in marketings, this was only a 2% decline.  Further, given that December 2011 had one less marketing day than December 2010, last month’s marketings were almost 3% higher on an average daily basis.

Given the placements and marketings for December coming in close to expectations, the January 1, 2011 cattle on feed inventory was up 3% as expected at 11.861 million head.  Overall, last week’s Cattle on Feed report is viewed as somewhat bullish, particularly to nearby months.  The large increase in light-weight placements could soften deferred months though.  So, some bull spreading might occur following this report.  But, market reaction won’t likely be too large as the figures were close to expectations and traders will be focusing on this Friday’s Cattle Inventory report.

The Cattle Inventory report provides inventory estimates for several classes of cattle and calves on a state level basis.  The most-anticipated numbers in this report this year will be the beef cow herd and the number of heifers held back for beef cow replacements as these are the keys to gauge whether overall herd growth will occur in 2012 and beyond.  Because the drought in the Southern Plains led to liquidation of large numbers of cows, national beef cow numbers at the beginning of 2012 are likely to be down as much as 2.5% from January 1, 2011.  For South Dakota and other Northern Plains and western states, smaller decreases and even some modest growth in beef cow numbers are possible.  The decline in the number of heifers held for beef cow replacements may have stabilized in the latter part of 2011 when compared to the large drops seen in previous years.  Large declines in heifer retention in the south (due to drought) and Midwest (due to high corn prices shifting pasture to crop land) will likely be offset by growth in northern and western states from producers seeking to profit from historically high feeder cattle prices.  Interestingly, the ratio of heifer to steer prices (measured in the summer months when retention decisions are likely made) was higher in 2011 than in 2010, which suggests that the number of heifers retained will bottom and have the potential for growth in future years (Figure 1).  While many other factors influence the decision to retain heifers, this price ratio provides a general guide as to what is required to incentivize producers to retain heifers.  Note that the price ratio historically has had to approach 94% to lead to heifers being retained; this past summer it was still under 93%.

In addition to these beef cow herd indicators to watch in this Friday’s report, the annual Cattle Inventory report provides a count of the number of cattle on feed in feedyards with less than 1,000 head capacities as well as those with 1,000+ head capacities.  (Recall that the monthly Cattle on Feed reports discussed above and reported in Table 1 only includes feedyards with 1,000+ head capacities.)  Therefore, the combination of these reports provides the opportunity to estimate how many cattle are on feed in the smaller sized feedyards, which is particularly useful in gauging feeding trends in states like South Dakota that are characterized by larger numbers of smaller feeding operations that are a part of a diversified grain and livestock operation.  Over the past couple of years, there has been increasing evidence of a precipitous decline in the number of cattle being fed in these smaller feedyards, and this Friday’s report is expected to confirm continuation and possibly acceleration of this trend.  The smaller feedyards have been reducing their on feed numbers in response to stiff demand for feeder cattle and higher corn prices.  Many diversified farmer-feeders have found it more profitable to sell $6+ corn as opposed to feeding cattle.  Further, many tend to have lower ‘shut-down’ costs than larger commercial feedyards, so it is those smaller feedyards that will reduce on feed numbers the first in an industry with substantial excess capacity.

Table 1

Figure 1

For more information on USDA’s Cattle on Feed Report, please see “Interpretation of USDA’s Cattle on Feed Report” by Mark and Small.

The information in this report is believed to be reliable and correct.  However, no guarantee or warranty is provided for its accuracy or completeness.  This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers.  The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information.  There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.