The latest cattle on feed report released by USDA on Friday showed a feedlot inventory of 10.6 million head. This is a 4.3 percent increase over August 1, 2016, and is the largest inventory for August since 2012. In total, there are an estimated 439,000 more head of cattle in feedlots than at this time last year.
Placements were up 2.7 percent year-over-year which fell below the pre-report estimates. However, this value was still within the range of estimates and should not be viewed as a surprise. This is the first year since 2007 that placements in July were lower than placements in June. Remember June saw a 16 percent increase in placements over last year. It is very likely that the aggressive placements in recent months pulled some cattle forward that would have otherwise been placed during July.
Marketings were reported to be up 4.2 percent over last year – very much in line with pre-report estimates. The rate of marketings is still aggressive by many measures. However, as shown in the figure above, the number of market-ready cattle (measured as on-feed over 120 days) increased over last month. This number is still below 2016 levels, but it is still worth monitoring over the next few months as more supplies come through the system. If a large amount of market-ready cattle begins to build-up in feedlots, this would be a negative influence on the market outlook.
Hay production in the Southeast is estimated to be down by slightly less than one million tons as compared to 2016 levels according to USDA-NASS (National Agricultural Statistics Service) based on crop conditions as of August 1. This is approximately a three percent decrease in production. In Mississippi, production is projected to be approximately the same as last year at only a one percent decrease. Elsewhere in the U.S., there are sharp increases and decreases.
A recent publication from the Livestock Marketing Information Center shows an estimated U.S. hay harvest is 132.6 million tons, down 2% from last year. The estimate of area harvested was unchanged from the figure shown in their June acreage report and only up a fraction of a percent from last year. All other hay production is close to unchanged from last year. Drought in the Dakotas and Montana pulled down non-Alfalfa hay production. Average per-acre hay yields in North Dakota dropped 24% for Alfalfa hay and 37% for other types of hay. North Dakota hay production is pegged to be down 28% from last year. South Dakota hay production is expected to be down 8% from last year. The big difference between North Dakota and South Dakota hay crops is the 14% increase in harvested area of other hays than Alfalfa. The increase in area harvested offset the average harvest per acre. Between these two states, Alfalfa area harvested was unchanged from 2016 to 2017. Average Alfalfa harvest yield in South Dakota was down 10% from 2016, a much more modest decline than in North Dakota. Hay production in Montana is down 13% this year.
Hay production was up in some regions, in order to counter-balance the declines in the Northern Plains. Alabama, Georgia and North Carolina are all seeing hay production volume up by a double-digit percent this year. Colorado Alfalfa hay production is up 15%. Iowa Alfalfa production is up by a similar amount, percent and volume-wise. Interestingly, two states contiguous to Colorado and Iowa are showing big declines in Alfalfa production. The Kansas harvest is down 14% and Minnesota Alfalfa output is down 21%. Lastly, production on non-Alfalfa type hay in Oklahoma is down 16%, for the most part due to less harvested area. Alfalfa hay production in Oklahoma is picking up some of the slack, offsetting about half the decline in other types of hay.
Cattle futures markets were down significantly last week including a 4.5-cent limit decrease last Wednesday for the August feeder cattle contract. Live cattle trading at the time of this writing has the nearby contract at just under $109 and the October contract at around $107 per cwt. These prices are undervalued when compared to the cash market prices which are around $115. There are many potential reasons for this decline with the increased supply of cattle to hit the market this fall a primary culprit.
Beef demand is relatively lower after the sharp increases in May and June. The choice boxed beef value is $205, down nearly $45 from just two months ago. Much of this decline is seasonal variation. Beef demand is usually higher around the start of summer grilling season as Memorial Day and Independence Day help to boost sales. However, the recent lower prices have left boxed beef just above August 2016 prices. This can be viewed as slightly positive since prices are higher even though beef production is 3 – 4% higher. However, the futures market signals worry over prices as we approach the Fall.
While the supply concern will remain throughout 2017, relatively cooler weather in cattle feeding areas also probably had a short-run impact on the decline in futures markets last week. Cattle generally gain weight faster during lower temperatures which could result in heavier beef production sooner than expected. Carcass weights are also seasonal and have begun to increase. Usually, weights will increase throughout the Fall and into the Winter months.
In summary, the movement of the cattle futures markets last week is a signal of the challenges that will continue throughout 2017. Most traders, including those of large funds, are currently bearish on prices as they consider the impact of more cattle flowing through the system.
The latest monthly meat trade data were released this morning and showed further increases in the amount of beef exported in June. U.S. beef and veal exports totaled 238 million pounds during the month of June. This was about a 12 percent (or 25 million pounds) higher than June of 2016. As shown in the chart, this continues the trend of boosted exports in 2017
The largest increase in exports was in Japan. Nearly 8 million more pounds of U.S. beef was exported to Japan in June of 2017 than in June 2016. This further highlights the potential impact of the increased tariff on U.S. beef in Japan (discussed here). Since it takes a while to collect the data, exports under the increased tariff will not show up in trade data for another 2 months.
Second and third on the increased exports are South Korea and Hong Kong. Just these three countries make up 18 million of the 25-million-pound increase in U.S. exports over last year. There are a few countries in which U.S. exports have actually decreased this year. Canada is the largest of these as one of our primary trade partners. Exports to Canada have decreased by about 3 million pounds from June of 2016.