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June Cattle Feedlot Placement Numbers Hit Highest in 11 Years

The nation's cattle herd, all beef and all dairy numbers combined, came to 102.6 million head in USDA's bi-annual survey of cow/calf producers. This is the largest cattle herd we have had in nine years since 2008.

Our focus for this report is on the female activity. Beef cows totaled 32.5 million head, also the largest in nine years. Of interest, beef heifers held back for the cow herd were actually 2% under levels from two years ago. One of our quick and dirty measurements is to compare beef heifer retention as a percentage of the total beef cow herd. That comes to a 14.5% replacement rate. That is the lowest in five years. This would imply that producers are no longer saving heifers back aggressively. That sounds good, but is more of a longer term issue. The bearish of that argument is that if they aren't being saved, these young females will hit the feedlot. That was borne out by the category called 'other heifers'. USDA counted this group at 7.3 million head; the largest in five years. Overall, this report suggests cow/calf producers are in the process of stopping expansion. That still means we have plenty of cattle waiting for 2018. You'll notice in these comments no comparison against last year. There was no July 2016 survey due to budget constraints. 

The second big report today was the monthly Cattle on Feed. USDA's monthly survey of feedlots found that they placed 16.1% more cattle in the nation's feedlots in June. Placements are new calves and feeders entering the feedlot from 450 to 950 pounds. They will visit the feedlot for a three to eight month visit where they finish out from 1,200 to 1,600 pounds. The average steer these days runs at 1,365 pounds live.

This 16.1% higher placement number blew the doors off anyone's expectation (trade guess +6.1%). This was the largest June placement in 11 years. We have now put in 11.5% more cattle than last year over the past eight months. Though we truly understand the industry's bullish enthusiasm and clearly want to ignore bad news, this is not good. We have stated our concern for several weeks.

In the past two years, we have had a contra-seasonal supply flow. The biggest supplies and lower prices hit in the fall rather than summer. This year's increase into fall will be much larger than last year. June placements finish out in the December through March time frame. Today's COF report news will not add to the fall supply problem; it extends it out into winter. The other problem here is that these numbers were not just Northern Plains cattle. Yes, South Dakota's small feedlot population put in 67% more head. Iowa's feedlots put in 33% more head than last year. There is no North Dakota placement number because it is too small. Yes, some of these were drought-based liquidations. However, the Northern Plains simply don't have the cattle needed to push nationwide placements up by 16%. For the top feedlot states we see active placements all around: Texas +18%, Nebraska +16%, Kansas +13%, and Colorado +19%. Northern Plains were liquidating some heifers but the numbers overwhelmingly show everyone was placing. The industry is just plain bullish. It is not hard to see why, though. Fat cattle leaving feedlots in June had a $108 breakeven. Even with the sharp drop in cattle prices recently, we are not low enough to cause financial strain at the feedlot level. Separately, marketings of fat cattle out of feedlots in June came to 4.0% over last year, just under the 4.7% trade estimate. With big placements and moderate marketings the feedlot population rose from 2.7% over last year on June 1 to now 4.5% over last year on July 1.

In the short term, cattle feeders held out for $120 on Friday and got it. That was even with last year and considered a victory. Given this week's slaughter numbers, the very short term supply news is also positive. Only 622,000 head will be processed this week according to USDA's weekly survey. This was 15,000 head under our estimate from the AM comments. This was the lowest non-holiday kill in eight weeks. It was also 4.3% over last year, just under the 5.5% over last year pace from the past four weeks.

Given the big picture supply problem that we expect from fall into Q1 we cannot get bullish here. Many will disagree with us but given the numbers, we can't work it out. Officially, our fundamental price target of $114 to $117 is still right on. That will be revised (lower) for next week's Allendale AgLeaders Conference. Cattle feeders following our advice should have sales on from $120 to $123 via the August that were applied against the August contract after May 4. We will not be trading this hedge. Feed hedges were applied on the July 3 open when December corn futures were around $3.95. The strategy discussed was a simple bull call spread. This is to cover a summer weather rally. For those asking, this is not a bet that corn has to go higher. This is a risk avoidance move. On price declines, this strategy is only out the premium paid upfront, like insurance. 

 

Rich Nelson
Allendale Inc. 
815-578-6161

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