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USDA Cattle on Feed Report Neutral to Friendly for Beef Prices

On-feed inventory nearly matching 2013 keeps near-term cattle and beef supplies adequate

USDA reported April feedlot placements of 1.636 million head, down 5% from a year ago. Fewer cattle went into feedlots than the down 3% that traders expected. That's market friendly.

The May 1 feedlot inventory, at 10.648 million head was down 1% from a year ago and a tad smaller than traders generally expected. That's also a bit friendly.

April fed cattle marketings at 1.778 million were 2% smaller than April of last year. Marketings came in a bit lower than traders expected.

Lower April placements and fewer cattle on feed May 1 than a year ago confirm that beef supplies will continue to stay tight.

However, for the immediate future fed cattle slaughter and beef available to consumers will be relatively abundant for two reasons. One, slaughter cattle supplies normally rise into the early part of the summer. Second, upticks in placements late last year and in January and February of this year, relative to the same month a year earlier, will supplement near term beef supply.

Some market participants think the near-term supply uptick will be limited. They contend that the 372,000 more cattle feedlots placed in January and February of this year than last year is roughly three days' worth of slaughter. While modest, it's still a supply uptick.

Few dispute than once the seasonal slaughter uptick passes, fed cattle supplies will tighten. Here's evidence. June and August fed cattle are trading around $137. October through April of next year trade from $142 to $146. Those premiums suggest that for beef to get any lower priced into fall, the entire beef complex structure would have to retreat.

Tell your neighbors and friends to stock up on beef this summer. The lowest retail prices of the next 12 months, likely longer, lie immediately ahead.

Cow-calf profits to roll on. A host of factors will support feeder cattle and stock cow prices for the foreseeable future:

Cattle inventories are the smallest in more than 60 years, severely restricting feeder cattle available to place.

Nationally, feedlots have surplus bunk space, which spurs competition to buy feeder cattle.

 Feedlot managers do not like to see empty pens. Their psychological desire to fill pens further intensifies competition to buy feeder cattle.

Beef profits entice cow-calf producers to retain heifers to expand cow herds, which further tightens feeder cattle supply.

Corn prices retreating from earlier drought-induced highs trim costs to feed cattle. Feedlot managers have a long-standing propensity to bid those cost savings into feeder cattle prices.

 Porcine epidemic diarrhea virus has kept supplies of competing pork lower than they could have been.

Despite ample chatter about how rapidly the broiler industry can turn an egg into a chicken breast, boosting the broiler breeding flock to get the eggs to hatch to up broiler output will take a bit longer.

Rising incomes in Asia, particularly China, up bolster U.S. meat exports

Optimists see nothing but blue sky from now on, which lures cow-calf producers to up output. Still, the earliest producers can put more beef on dinner plates is 2016. Doing so by then could well turn out to be a stretch.

Ample uncertainties exist. The bigger the uncertainties, the more the risk producers face and the higher expected profits have to be in order to trigger cow herd and beef expansion. Some considerations are:

Whether to retain heifers to generate potentially higher, but unknown, income later vs. banking a sizable, and known, amount of cash now by selling them to feedlots.

How 2014 and 2015 crops develop, which will guide costs to finish cattle and in turn determine how much feedlots are willing to pay for feeder cattle.

Grazing conditions will regulate the rate of heifer expansion and cull cow sales to determine herd expansion.  Good grazing would entice cow-calf producers to hold more heifers, further tightening near-term feeder cattle supply and buoying prices. Eroding grazing would divert heifers to feedlots. That would up intermediate beef supply, but make supplies even tighter in the out years.

Competition from pork and broilers is certain to rise.

Spring saw cow-calf pair prices knocking on the $3,700 door say now is a good time to own cows. Whether now is a good time to buy cows is a different proposition. Just as feedlot operators have a strong propensity to bid their expected cattle feeding profits into feeder cattle prices, cow-calf producers may have an equally strong inclination to bid expected feeder cattle profits into cow prices.

Those same forces bid up prices and rents of grazing land. Fixed costs are slow to retreat when prices sour.

When and how strongly consumers may push back against high prices remains a big unknown.

Policy issues, such as country of origin labeling can affect demand.

Events such as last year's beta-agonist use controversy or the 2012 lean finely textured beef media debacle are nearly impossible to predict.

Trade deals matter. A BSE-type event can disrupt exports overnight.

The Bottom line. Managers can and manage the risk of things that might go wrong if they can anticipate them.

Not so with unexpected upsets, which leads us to another old saying, "The only true risk management strategy is to have something stashed away in the sock." Those who are long on equity and short on debt are best positioned to weather the tough times that are bound to come.

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