More Heifers!

The nearby March corn futures contract staged a fairly impressive rally last week, gaining $0.30¼.  Lingering concerns about South American drought, strong export sales, and commercial and fund buying all provided support to the corn market.  Interestingly, though, one of the factors that has been quite supportive to the corn market is the lack of producer selling.  In particular, this has helped to strengthen basis by 5 to 10 cents, or more, in many Midwest markets.  Last Friday’s close in March corn futures, at $6.41¾, was within a dime of the prices traded before the bearish Grain Stocks and WASDE reports on January 12.  Given the additional stronger basis (record strong for January in some markets), the cash market has retraced all of the $0.58/bu drop following those reports.  From a technical perspective, March futures would likely find significant resistance with another $0.10 to $0.20 increase.  From a fundamental standpoint, the risks of easing drought in South America, increased U.S. producer selling, and larger 2012 production forecasts will begin weighing on the market.  Corn growers should review their marketing plans and consider some incremental sales of both old crop and new crop.

The fed cattle market also saw an impressive mid-week rally last week too, with CME Live Cattle futures reaching a record $125.95/cwt.  However, last week’s news centered on the much-anticipated annual cattle inventory report.  Released on Friday afternoon, January 27, USDA’s estimate for the cattle and calf inventory in the U.S. as of January 1, 2012 was bullish relative to pre-release expectations in all but two categories.  The total cattle and calf inventory on January 1, according to USDA, was 90.769 million head.  After accounting for a 100,000 head upward revision in the January 1, 2011 estimate, this year’s inventory is 2.1% lower than a year ago.  The average trade estimate called for a 1.5% decrease.

As discussed in last week’s Cattle & Corn Market article, this report’s key figures to watch for signs of herd rebuilding are beef cow and heifer replacement numbers.  USDA’s estimate of 29.883 million beef cows was 3.1% lower than a year ago.  Pre-release expectations on average expected a smaller 2.5% decline.  Much of the national decline in beef cow numbers was lead by south central states impacted by drought.  Beef cow numbers in Texas, the largest beef cow state, were down 13.1% from last year.  In neighboring Oklahoma and New Mexico, beef cow numbers declined 14.3% and 10.9%, respectively.  The South Dakota beef cow herd was unchanged at 1.61 million head, but nearby states saw some increases:  Iowa (+6.5%), Minnesota (+1.4%), Nebraska (+6.3%), Wyoming (+2.9%), and Colorado (+3.0%).  North Dakota and Montana, though, had 2.0% and 1.4% fewer beef cows.

Much will likely be made of the fact that the 29.883 million head beef cow inventory is the smallest in fifty years.  It is important from the standpoint of the industry structure, including size, number, and location, which will be the subject of an upcoming article on iGrow.org.  However, it is also important to remember that the U.S. has produced more and more beef during that time period as well.  In fact, in the last 25 years, the country has produced 114 more pounds of beef per beef cow.  Much of this productivity growth has resulted from significant increases in carcass weights of fed cattle.  So, while the historically tight cow numbers are important, it hasn’t resulted in a decrease in beef production.

The largest surprise in last Friday’s Cattle inventory report was the number of heifers held back for beef cow replacements.  The average of the pre-release estimates was 97.8% of a year ago, ranging from 96% to 99.8%.  USDA’s count of beef heifer replacements was 1.4% larger than a year ago, exceeding even the highest of expectations.  While those same drought-stricken states did see sizable declines in beef heifer retention (Texas, -9.8%; Oklahoma, -15.5%; New Mexico, -21.1%), South Dakota and surrounding areas saw some of the larger increases in heifer retention:  South Dakota (+14.3%), Iowa (+16.7%), Nebraska (+18.3%), Wyoming (+17.9%), Colorado (+29.2%), and Montana (+2.5%).  North Dakota saw a 1.1% decline in heifer retention; however, that follows a year with a 12% growth in heifer numbers.

The larger-than-expected heifer retention figures technically are bearish to market prices in future years as it is a signal that the herd will begin to grow more than expected.  However, given the dramatic reductions in beef cow numbers and the calf crop in recent years, and the structural changes it is causing in the industry, this sign of some modest growth is likely to be viewed relatively positively by many in the industry.

USDA revised its earlier estimate of the 2011 calf crop down by 186,800 head.  Now at 35.313 million head, it is 1.1% lower than 2010 and just slightly lower than the average of pre-release expectations.  The 2011 calf crop is the smallest since 1950.  In other feeder calf inventory categories, the number of steers and non-replacement heifers weighing more than 500 pounds was down about 2% on January 1.  The number of steers, heifers, and bulls weighing less than 500 pounds was down almost 3%.  Although not explicitly reported in the Cattle inventory report, these figures, along with cattle on feed numbers, can be used to compute the residual supply of feeder cattle that have not yet been placed on feed.  At about 25.7 million head, that is the smallest ever supply of feeder calves available for feeding on January 1 and 4% fewer than on January 1, 2011.  Despite relatively high corn prices encouraging more forage-based backgrounding and stockering programs, the supply of feeder calves not in feedyards has declined dramatically as a function of smaller overall calf crops and ramping up of feedlot placements due to drought and competition for available supplies.

The January Cattle inventory report’s cattle on feed numbers better reflect the tight supply of feeder cattle available for placement than recent monthly Cattle on Feed reports.  USDA’s Cattle inventory report provides an estimate of cattle on feed in all sizes of yards whereas the monthly Cattle on Feed report provides inventory estimates for only feedyards with more than 1,000 head capacities.  The monthly January Cattle on Feed report indicated that the January 1, 2012 on feed numbers were 3.0% higher than last year in the 1,000+ head capacity feedyards.  However, last week’s Cattle inventory report pegged the number of cattle on feed in all feedyards, regardless of size, at 14.1 million head, only 0.8% higher than a year ago.  Thus, cattle inventories in feedyards with less than 1,000 head capacities have fallen by 9.5%.  At 2.26 million head of cattle on feed in the less than 1,000 head capacity yards, these feedyards’ inventories are the smallest on record.  Many of these smaller feedyards are likely part of a diversified farm operation and have shifted away from feeding cattle to crop production in recent years due to increasing profit margins in corn and soybeans relative to cattle feeding.  Further, even though larger feedyards have significant economies of scale, it is difficult for them to operate significantly below capacity due to fixity in facilities, equipment, and labor.  However, smaller sized feedyards with multiple enterprises have fewer “shut-down” costs associated feeding substantially fewer (or no) cattle.

Table 1

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.