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The Beef Angle

August feedlot placements set record low

August feedlot placements set record low
Despite record retail beef prices fueled by shrinking cattle supplies, consumers are still willing to pay for my favorite center-plate protein.

THEY say it always gets worse before it gets better, and based on the Cattle on Feed report the U.S. Department of Agriculture released Friday, the wisdom appears to be holding true, at least in terms of the “marketing hole” building in the cattle trade.

USDA reported that August feedlot placements were the smallest on record since the current data series began in 1996. At 1.79 million head, placements were down 11% from last year, and well below the average of analysts’ pre-report estimates.

Despite record retail beef prices fueled by shrinking cattle supplies, consumers are still willing to pay for their favorite center-plate protein.

Last month’s report showed a similar surprise, with July placements down 10% from the previous year, at 1.72 million head. Consider also that placements last year declined some 10% the July 2011 figure, so the July placements were being compared to already low placement levels in 2012.

They say that droughts have long tails, and the multi-year drought that has plagued cattle country is still showing up in USDA’s feedlot inventory data. The total number of fed cattle on feedlots with more than 1,000 head as of Sept. 1 was 9.9 million, down 7% from last year.

So the question becomes, is this what demand destruction feels like? Consumers have been paying near-record retail prices for beef, and with fewer and fewer head on feed, one has to assume that prices are going up, and going up for the foreseeable future.

At what point do consumers say, “No thanks, I’ll have a pork chop instead?” Pork and poultry producers are banking on that in a big way in 2014, and in some cases it might already be happening.

AUGUST red meat production in the U.S. totaled 4.2 billion lb., down 4% from 2012, according to the latest Livestock Slaughter report from the USDA's National Agricultural Statistics Service. Even with smaller production last month, accumulated red meat production for the year was down just slightly from last year's figure.

Digging into the slaughter data, USDA reported that beef production, at 2.24 billion lb., was 5% smaller than last year. Cattle slaughter totaled 2.82 million head, down 6%, but liveweight was up 3 lb. from last year, at 240 lb.

Analysts largely expect liveweights to trend lower in the final quarter of the year as Zilmax, Merck Animal Health's zilpaterol beta-agonist, will more or less be phased out of commercial production during the month of September. The company temporarily suspended sales of the popular growth-promoting feed additive after Tyson Fresh Meats announced that it would no longer accept cattle finished using the product.

How the product's absence will ultimately affect beef production remains an open question; anecdotal evidence from the field suggests that many major producers have switched from Zilmax to Elanco's competing product, OptaFlexx. While OptaFlexx is not viewed as aggressive in terms of adding productive pounds to finished cattle, it should save anywhere from one-third to one-half of the pounds Zilmax use added to U.S. finished cattle.

Regardless of the feed additive situation, Friday’s On Feed report showed that the number of cattle on feed for the next several months will be smaller than last year’s already historically small levels.

At this point, consumers’ willingness to pay is trending closer and closer to average retail prices for some products. In the September update of his Food Demand Survey, Oklahoma State University economist Jayson Lusk found that consumers were willing to pay $4.16 per lb. for “hamburger,” while the Bureau of Labor Statistics reported ground chuck averaged $3.51/lb., ground beef averaged $3.45, and lean and extra lean averaged $4.89/lb.

For steaks, meanwhile, consumers’ willingness to pay actually increased 8.3% last month, to $7.15/lb., compared with BLS’ report of $6.60 for USDA Choice, boneless sirloin. Interestingly, Lusk found willingness to pay for steak was precisely $6.60 in his August survey.

That willingness to pay increased last month is largely a sign that consumers’ confidence in their economic situation is improving, squaring with other economic indicators including jobs and housing data.

If feed prices continue improving in the last quarter of the year, and feeders actually see a return to profitability after bleeding red ink for 30+ consecutive months, it could go a long way toward keeping retail beef prices on the right side of consumers’ willingness to pay for my favorite center-plate protein.

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