Sharply higher feed costs have forced a dramatic reduction in the number of cattle placed on feed. Since June, when corn prices started their upward move, feedlots have reduced feedlot cattle placements by almost 1.3 million head compared to the previous year (if we include the average October estimate). Some of this comparison may be skewed a bit by the fact that in 2011 feeders in the Southern Plains were forced to market calves early due to drought pressures and lack of adequate pastures. This year, pastures in the Southern Plains were somewhat better, which limited placements of light cattle from that region. Still, overall US pasture and range conditions in 2012 were even worse than in 2011. Which brings us back to corn and other feeds. While drought is a factor in pushing calves onto feedlots, it is not a determinant. The matrix of feed, feeder cattle and live cattle prices is what determines the pace of feedlot placements. Feedlot operators are adept at running least cost formulations on their feed ingredients but that becomes difficult when all feeds, corn, wheat, soy meal, DDGs, hay, etc increase by double digits in a matter of weeks. Consider the following: Cash corn in October at $7.76/bu (KC basis) +22%, winter wheat at $9.69/bu (KC basis) +23%, soybean meal at $490/ton +61%, DDGs at $290/ton (KC basis) +26%, and hay at all time record highs. The drought and high feed costs have depressed feeder cattle values but not enough to offset the entire increase in feed prices. Also, the volatility in live cattle markets and the inability of the beef cutout to break over the $200/cwt. mark point to the fact that beef supplies will need to decline further in order to bring a margin back in the cattle feeding business.
USDA will release on Friday the results of its monthly survey of feedlots with a capacity of 1000 head of cattle or more. Analysts polled by Dow Jones ahead of the report all agree that placements during October will continue to decline compared to year ago levels. On average the expectation is for cattle placements to be down 12.7% from a year ago and also 13.9% lower than the five year average. It is a pretty aggressive estimate given that in October 2012 there were two additional marketing days than in October 2011. Cattle marketings for the month are expected to be modestly higher, largely because of those two extra marketing days. On average analysts polled expect marketings for October to be 2.6% higher than the previous year. This compares to the preliminary steer and heifer daily slaughter statistics which show slaughter for October up 3.8% from the previous year. The combination of lower placements and higher marketings is expected to sharply reduce the number of cattle on feed as of November 1.
The average of analysts polled for the survey expects the total inventory to be down 5.4% compared to year ago levels. This represents a shortfall of about 640,000 head compared to last year and the expectation is for placements to remain light in the next two months. The rapid decline in placements implies a notable reduction in the number of cattle available for marketing by Q2 for 2013, the time when demand for grilling season hits its peak.