Inventory Insights

– Matthew Diersen, Risk & Business Management Specialist, Ness School of Management & Economics, South Dakota State University

The October Cattle on Feed report was very close to trade expectations. Placements during September were 2.1 million head, slightly above expectations. Marketings during September were 1.7 million head, even with expectations. The 11.3 million head on feed is 99 percent of a year ago. The placements by weight categories reflected a slight decrease in the volume placed at the heaviest weight classes, which should be somewhat supportive of prices in the short run. There was also a slight decrease in placements in the lightest weight class, suggesting limited selling pressure from cow-calf producers.

As it was the beginning of the quarter, there was also a breakdown of inventory levels by steers and heifers. The heifer mix, at 39.1 percent of cattle on feed, is larger than last quarter and a year ago. The continued high proportion of heifers confirms fewer held as replacements. It also suggests that lower production is expected as heifers are harvested at lighter weights than steers. The higher heifer mix should be supportive of live cattle prices for the next quarter.

Using data from recent Livestock Slaughter reports, beef cattle slaughter volume for the third quarter was up from year ago. Calf slaughter and beef cow slaughter were up slightly. Steer and heifer slaughter was also higher. The quarterly totals can be used to estimate some related quantity indicators. Using the slaughter totals, the Economic Research Service estimates the October 1 level of feeder cattle outside of feedlots is up sharply compared to a year ago, and at its highest level since 2009. The larger supply of feedlot-ready cattle is weighing on calf prices in the short run. The smaller number of heifers held back is partly causing the increase. The slight increase in cow slaughter volume, coupled with fewer beef replacements, suggest that January 1, 2020 cow inventory levels will be even with or slightly lower than year earlier levels. The USDA baseline did not have a decline happening until 2022. A smaller 2020 calf crop would be supportive of prices next fall.

The challenging weather conditions in South Dakota continue to delay harvesting of major crops. This in turn has delayed some calf sales. The average price for 5-600 pound steers was $158 per cwt in October across South Dakota, down sharply from $178 per cwt in 2018. The recent basis of $14 per cwt, relative to the October feeder cattle futures price, is also narrower than last year. Feed availability is quite variable, but there is usually some producers willing and able to background calves into the next year. The risk during the backgrounding phase, on average, is quite small. The average change in the March futures price between November and its eventual settlement in March was $0.08 per cwt when measured during the past decade. However, this masks the extreme price moves (up almost $15 per cwt heading into 2011 and down almost $19 per cwt heading into 2015) that are prevalent in feeder cattle futures.