Mainly Bearish News in the August Cattle on Feed Report

– Stephen R. Koontz, Professor, Agricultural Economics, Colorado State University

The cattle markets continue their slide through the late summer and last week’s news suggests this will persist into the fall.  Volatility remains the watch-word – but the overall trend remains down.

The August USDA Cattle on Feed report was released last Friday (8/19/16) and the tone is bearish to neutral.  The report indicated that the cattle feeding industry placed 1.6% more cattle on feed in July than the year prior.  This is 2% greater than average expectations taken prior to the report which is from a very wide range of individual analyst expectations.  Nonetheless, these are heavy placements for cattle likely to be marketed late this and early next year.  The report also indicated that marketings were 0.7% below the prior year and this estimate was exactly in line with average expectations.  The actual and expected decline in marketings is due to the two fewer business days this July compared to last.  The slowness of marketings through last month is simply not good news going forward.  And not just for producers as this may be an indicator of demand weakness in what is usually a strong season.   Total inventories of cattle on feed August 1 were 1.6% the prior year, 0.3% above average expectations, and to the high side of the range of expectations.  The fed cattle market began its move in the second half of the year with expanded inventories.

Market ready cattle inventories are tighter than the prior year but revealed a strong reversal of month-on-month reductions.  The market-ready inventories are below last year, are higher than an average of the last five years and increased sharply from the prior month.  Last’s years calculated inventory of cattle on feed over 120 days was enormous and contributed mightily to the market wreck through the last half of 2015.  2016 from April to July turned the corner and reduced the market ready inventories.  So the calculated inventory as of August 1 is decidedly bearish news.  Further, August through October is a critical time period when wrecks have a tendency to show up.  Further, placements remain largely of heavier feeder cattle and thus on-feed numbers are frontloaded.  Watching the strength of marketings, slaughter volumes, and wholesale beef prices will inform us as to how the fall will play out.  The news from August was not good.

There is not much bullish news to be found.  However, informal discussions with some cattle feeders has revealed that that heifer placement is stronger than expected.  Fed cattle slaughter has also shown an increase in heifer during July relative to last year.  There is the chance that some discussion will emerge that herd building in 2016 may not be as strong as originally anticipated.  This suggests weaker feeder cattle prices through the fall but an increased potential for stronger long –term prices.

What do the technicals and charts say?  August through December live cattle futures are decidedly weak.  The markets repeated nibble through support planes to lower prices and the subsequent rallies repeatedly stop short of resistance planes.  All contract have been drifting lower since spring.  Feeder cattle show a similar pattern with the exception of the reaction to the month of excitement in the corn market.  The charts reveal nothing contrary to the bearish fundamentals.