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255773

Cattle-on-Feed Report Sinks Prices Friday

Big placement numbers prove bearish

Technically, this week was a winner for bulls. Cash traded from $120 to $126 this week with most moving at $124. That was $4 over last week and the best market since June of last year.

Wholesale beef was a winner as well.

Choice picked up 7.94, and select was up 6.11. The snow-based rally in fats, and hopes of higher demand from generally above-normal temperatures, helped.

February futures, this week’s cash cattle, and this week’s cash beef are not the complete cattle story, though. For the other live cattle contracts ... April +0.02, June -0.52, August -1.02, Oct -0.75, and Dec -0.67.

For the feeders, the April contract posted a drop as well, -2.65 on the April.

The complete cattle story is that February and March is a temporary lull in supplies before the normal seasonal increase in supplies hit as we go into summer. This year’s early-summer through early-fall supplies will be much worse than normal due to the past placement flow.

The market mind-set is sure, we had snows this week but that had nothing to do with the problems waiting in the weeks ahead.

The 2 p.m. Cattle on Feed report won’t change anyone’s mind. January placements, the number of new calves, and feeders entering feedlots to start their three- to seven-month feeding period, came to 11.4% over last year. This will be considered neutral since it was next to the trade’s +11.1% average guess. There were big calf and feeder sales in recent weeks. They have also been going at much-better-than-expected prices. Exactly how many of these were headed for moderate weight gains via backgrounding/pasture and how many were headed to the feedlot was the question.

This placement number was the largest in three years. It also represents three months in a row of sizeable numbers (Nov +15.0%, Dec +16.9%, Jan +11.4%). This stacks the deck against the early-summer through early-fall fat cattle market. The number of finished cattle leaving feedlots in January, marketings, totaled +10.2%. That was right on the 9.8% average trade guess and considered neutral. The total number of cattle in feedlots grew from +0.3% on January 1 to +0.7% on February 1. That was right on the average trade guess.

For market reaction on Monday we could see a slightly higher open. We hit those summer futures hard today on the sell-the-fact portion of the storm issue. The placement number hit the trade expectation and didn’t exceed it.
There may be a slight increase in kill this week compared with last week, from 572,000 to 575,000 head. This was 6.4% over last year. The six-week average is 5.5% over last year.

We are running a little heavier than our expectation for Q1. That expectation was for a 3.3% increase in slaughter. If there is a chance to be bearish over the next six months, it should be right now. On a seasonal basis, if this week’s rally is a failure, then it raises concern about the potential downside ahead. Based on our models, we should have a larger-than-normal increase in supply waiting as soon as April comes. That heavy supply will run from April through October.

Weights are an interesting issue. Carcass weights in the latest week, three weeks ago, ran 10 pounds lighter than last year (steers -12, heifers -4). This is 1.2% under last year. In recent weeks, we have seen warmer-than-normal weather. On the other hand, the storm this week in the North could obviously trim that. Beef production this week may total 470.7 billion bushels assuming USDA’s estimates of Friday and Saturday slaughter is correct. That would be 5.5% over last year. This is over the past six weeks that ran 4.4% over. In the big picture, we are running over our expectation of Q1 production (6.091 billion lbs, +2.6%).

We remain clear bears for general pricing for 2017. The short-term rebound here is good to see but does not change our concern for supplies up ahead. Current discussions for the summer low come to $96 for August futures.
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Rich Nelson Allendale Inc. 815-578-6161
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