There is plenty of positive news in the fed-cattle market, but also some challenges ahead as two major trends affect the short- and long-term outlook for cattle feeders. One of these is the stalled cattle cycle, with weather and other factors preventing herd expansion in spite of several years of profitability in the cow-calf sector. The other is continuing growth in ethanol production and its affect on feed prices.

USDA’s mid-year Cattle Inventory report, released July 20, indicates herd expansion remains on hold. The report lists an inventory of 104.8 million head on July 1, down about 400,000 compared to 2006. The beef cow herd, at 33.35 million head, also was down slightly from one year ago, and USDA estimates the 2006 calf crop at 170,000 head smaller than last year.

Perhaps even more importantly, beef replacement heifers were down 6 percent from last July. That figure matched with USDA’s July Cattle on Feed report, also released on July 20, showing a 6 percent increase in heifers on feed, even though total feedyard inventories were down 1 percent. With so many heifers going to feedyards instead of into breeding herds, and 2007 cow slaughter generally running ahead of last year, inventories are not likely to increase soon. Even if producers begin retaining more heifers next year, it will be at least 2009 before those numbers could translate to a larger calf crop.

The continuing decline in the U.S. cattle inventory will support prices for all classes of cattle, with the fed market likely to remain in the upper $80s to upper $90s through this year and next. Feeding margins will stay tight though, with calf prices remaining strong and production costs high.

Those production costs lead to the other major trend — delayed placements into feedyards. Several months of Cattle on Feed reports have shown a reluctance to place lighter cattle.

Placements into feedyards during June dropped 15 percent from June 2006, and most of the decline was in the lighter weight classes. Kansas State University economist James Mintert notes that placements weighing less than 700 pounds declined 27 percent during June compared with June 2006, while placements weighing more than 700 pounds declined just 3 percent. That trend is likely to continue through this fall and winter, with more yearlings moving to feedlots and calves remaining on pasture. One exception could be that feedlots in the Midwest, with lower corn prices and better access to distillers’ grains, probably can place calves at more favorable breakevens than those in the Southern Plains.

Beef exports continue to improve as markets open. University of Missouri economists Glenn Grimes and Ron Plain report that during May beef exports to Japan alone jumped 65 percent from April. From January through May, total beef exports were up almost 16 percent from the same period last year, with exports to Japan up almost 400 percent.