Bearish tone to Cattle on Feed report

What’s happened

The USDA Cattle on Feed report released on Oct. 20 contained numbers that caught the market somewhat by surprise. Cattle placed in feedlots were higher than anticipated and outside the range of estimates. In addition, the number of cattle marketed in September was lighter than expected. The response to the report was a negative reaction, with prices leaving a gap on Friday and trading sharply lower on Monday. Speculative selling and producers establishing hedges were likely players on a day that saw live cattle futures down well over $6 per hundredweight (cwt). Prices had been well supported prior to the report, due to tight supplies of market-ready animals and steady demand. The question now is whether the numbers have a real impact, or if this is just a one-time report reflecting farmers adding cattle to feedlots prior to harvest. It's likely that it is a one-time negative report.

There are three primary elements in the Cattle on Feed report that summarize the overall view of cattle supplies: placements, marketings, and cattle on feed. Placements are the number of cattle placed into feedlots from the previous month, in this case September. Cattle marketed are the number of cattle that were marketed, and cattle on feed is a count of the overall number of cattle that are in feedlots with capacity of 1,000 head or more. The report is released each month with figures relative to pre-report estimates as well as actual figures from a year ago. One that jumped out in October’s report is placements during September at 106%, above the pre-report average estimate of 101% and above the highest pre-report estimate of 104.8%.

The pre-report estimates are derived from surveys of analysts. Actuals reported over the last several years indicate a declining cattle herd, which has led to higher prices. So why would the September numbers be negative? One theory as to why placement numbers were so high is that farmers moved cattle into feedlots, anticipating there will not be time to do so during the harvest season. This makes some sense. Keep in mind that hot and dry conditions in the northern Plains late in August and early September may have also prompted moving cattle into feedlots. Corn prices had reached their yearly lows by Sept. 19. Therefore, the cost of feed for feedlots was cheaper in September than at any time over the last two years. The marketing number was light at 89%, reflecting either the fact that cattle didn’t gain weight well into the heat of late August and early September or more supplies will be headed to market in October. This might also explain why feeder cattle placed in feedlots were smaller (in stature) than typical. The on-feed at 101% reflected a slightly higher number of cattle in feedlots, yet a 1% deviation is not a big enough number to be concerning.

Why this is important?

Recently, December live cattle futures reached their contract high of $192 on Sept. 15. As of this writing, they reached a low of $177.30, nearly a $15 drop. Prices are still high from a historical perspective, yet the unraveling of a bull market may be at hand. Defending high prices can be a challenge.

What can you do?

A strategy to set a floor and leave upside price potential unlimited is to purchase put options. Puts provide the owner the right (not obligation) to sell futures. History suggests that when bull markets end, it can be violent. What may take many months for prices to advance can be lost in weeks. The Cattle on Feed report may have added negative fuel to a trend that may have already been developing. Puts in front of USDA reports makes sense, as reports can sometimes be surprises.

Editor's Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

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About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.