June 23, 2011

US drought affects feeder cattle in feedlots

Producers are turning off a rising number of feeder cattle into US feedlots (at somewhat lighter weights) so far in 2011 due to extreme drought across southern regions of the US.

Alongside the increase in US supplies, there has been a boost in feeder cattle numbers from Mexico, with total US cattle imports from Mexico so far this year (January-April) up 28% on year ago levels, according to USDA.

However, with the US cow-calf inventory at its lowest level in over 40 years, recent USDA feedlot figures show cattle placements into US feedlots during May declined 11% on year ago levels, to 1.81 million head.

The decline in cattle placements has placed a bullish trading environment on the US Cattle Futures markets, as pre-report estimates expected placements to only decline 7.5%. Settlement prices for the August CME Live Cattle and Feeder Cattle Futures contracts on Monday lifted 1.775 cents and 2.85 cents respectively, to 111.975 cents per pound and 135.5 cents per pound. The recent upswing in settlement prices comes after the market quickly started to decline in April.

It is expected cattle placements into feedlots will continue to ease moving into the second half of the year, as the tight cattle supply situation looks to have been exacerbated by the recent liquidation of feeder cattle and cows. This will tighten fed beef supplies moving forward, with the USDA forecasting US beef production in the fourth quarter of this year and the first quarter of 2012 to drop 4% and 7%, respectively, on year ago levels.

While the US Cattle Futures market is bullish about US cattle prices, there are bearish factors worth noting that could weigh down on the market over coming months.

Driven by feeder and processor demand, the depth of any cattle price increase will eventually depend on US consumer demand for beef, which appears to be waning as economic uncertainty slows foodservice sales. Alongside this, beef prices (particularly lean manufacturing) start to seasonally decline from September, as the US moves out of its peak beef summer demand period.

The recent run up in corn prices will also look to dampen feeder cattle demand, as feedlot margins return into negative territory.