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Analyzing the cattle-on-feed reports

Market Update with Jerry Klassen: What looks like bearish news is sometimes the opposite


The Alberta and Saskatchewan cattle-on-feed reports can provide valuable information for cow-calf producers and backgrounding operators. Finishing feedlots often pay attention to the main numbers in the cattle-on-feed reports but fail to look at fine details such as the feeder cattle placements by weight category.

In some cases, media reports suggest the report is bearish but live cattle futures are significantly stronger the following Monday. It’s on these days that I often receive calls from producers asking why is the futures market higher when the cattle-on-feed report was supposedly bearish. I then ask the caller if they had a chance to look at the report. Obviously, they’ve been misled and fail to analyze the fine details.

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I thought this would be a good time to review the USDA December cattle-on-feed report, which is available to the general public. It’s also a good time to briefly discuss the Alberta and Saskatchewan situation based on the January report. By having a good understanding of these reports, cow-calf producers and backgrounding operators will do a better job of marketing and have more confidence when implementing their risk-management program.

The USDA reported that cattle on feed as of Dec. 1 for feedlots with capacity of 1,000 head or more totalled 12 million head, up two per cent from Dec. 1 of 2018. Placements during November totalled 2.09 million head, up five per cent from November of 2018. These are usually the main points that producers remember about a report but they fail to look at the placements by weight category.

On the surface, this report looks quite bearish because on-feed supplies and placements are above year-ago levels. Initial thoughts from producers are that more supplies should result in lower prices. This report was released on Dec. 20. At the time of writing this article in mid-January, both fed and feeder cattle prices had been percolating higher over the past month. What’s going on?

The key information

The key feature of cattle-on-feed reports is that placements by weight category. Most producers don’t understand this. Let me explain. In the accompanying table we have the U.S. feedlot placements for May 2019 through November of 2019. Below the actual placements is the change from a year ago. I’m going to run through a brief exercise which may seem tedious but the result will prove valuable.

During May of 2019, placements in the under-600-pound category were 370,000 head, down 75,000 head from May of 2018. These cattle under 600 pounds will be slaughtered in January of 2020. Next, we look at the June placements in the 600-699 pound category, which were 295,000 head, down 50,000 head from June of 2018; in July, placements in the 700-799 pound category were 410,000 head, down 5,000 head from July of 2018. Notice in August, placements in the 800-899 pound category were 440,000 head, down 35,000 head from August of 2018. During September, placements in the 900-999 pound category were down 7,000 head from September of 2018 and in October, placements in the 1,000-pound plus category were up 25,000 head from the previous year.

If we add all these year-over-year changes, we can conclude that market-ready supplies during January of 2020 will be down a whopping 147,000 head from January of 2019. Without going into detail, U.S. market-ready supplies of fed cattle will also experience a year-over-year decline.

Recent data shows the actual slaughter for January is coming in above year-ago levels. Therefore, cattle are being marketed sooner than anticipated and average carcass weights should decline over the next month. Cattle-on-feed reports have minimal impact on the fed cattle market in the short term. Cattle that will be processed in the two months following the report have been on feed for 80 to 120 days. The most recent cattle-on-feed report is most important for the fed cattle market three to six months forward.

The same exercise can be conducted for Western Canada using the Alberta and Saskatchewan cattle-on-feed reports. I won’t give away all my secrets, but Canadian feeder cattle imports from the U.S. during October and November totalled 89,917 head, up from 62,305 head for the same time last year. Alberta and Saskatchewan feedlot inventories as of Jan. 1 were up 20 per cent from Jan. 1 of 2019. This is bearish for the feeder cattle basis. Market-ready supplies in Alberta and Saskatchewan during June of 2020 could be up 80,000 to 90,000 head over June of 2020, which is bearish for fed cattle basis for the early summer.

The cattle-on-feed report is a non-event for the cattle market in the short term. If feedlot inventories are sharply above the five-year average, the cattle-on-feed report can be bearish on the feeder cattle basis in the short term because of high feedlot inventories. The cattle-on-feed report largely affects the fed cattle market in three to six months forward.

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain trader GAP  SA Grains and Produits Ltd., and is president and founder of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204 504 8339.

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