A Few Thoughts by John Nalivka: About those marketing holes and walls . . . . . .
April 26, 2018
"Marketing holes and walls" in the supply of market-ready cattle can be pretty elusive. To begin with the USDA cattle on feed survey data can have inherent problems, but in addition, we don't really know the feeding performance of cattle in all the feedlots in the major feeding regions. This has a lot to do with weather, management, quality of feed, age of cattle, weights when placed on feed, and cattle genetics. Consequently, my tendency has been to not get too caught up in the possible opportunities or wrecks that any probable marketing "hole and wall" might pose. However, this year may be a little different.
U.S. cattle on feed inventories have posted significant year-over-year increases since December 2017 and by March 1 reached a 10-year high as wheat pasture grazing was non-existent due to drought. As we know, those calves went into backgrounding programs in feedlots. There has been much discussion about how this affects the marketing pattern of these cattle. Most moved onto a finishing ration and did not leave the feedlot, particularly with low cost-feed. This is where we can begin to speculate about "holes and walls" in the marketing pattern.
With expected daily gains, they will likely begin to show up at the packing plant during the second half of May. Increased cattle slaughter numbers will continue well into the third quarter. In addition, carcass weights will be heavier than a year ago. Beef production will be up 9 percent during the second quarter, mostly in the latter half of the quarter while third quarter beef production will likely post a 4 percent increase. This is the anticipated "wall" of cattle. Prices will be pressured lower. That seems certain. To what extent, that isn't so certain. And to further frustrate the market is a continued record supply of hogs, more poultry, and uncertainty over trade.
For feedlots, there is a positive aspect to this story. Well actually, there are two. First, before, we find that "wall" of cattle, fed cattle supplies will be relatively tight over the next 30 days as the weather begins to cooperate and consumers get anxious to get out and grill. Retailers begin buying as we head into the grilling season. Prices have already firmed and are posed to strengthen. This is supported by solid packer margins and relatively low feedlot break-evens – for those who have market-ready cattle.
The second positive aspect here may be another "hole" developing at the end of the year and into early 2019. Those calves that became the third quarter "wall" of cattle did not become feedlot placements in the third quarter to be marketed in the late fourth quarter – early first quarter 2019. As I said earlier, circumstances change and USDA data quality is important but, this supply scenario is certainly probable.