Bullish Cattle on Feed Report Lightens Supply for 2019

The monthly Cattle on Feed (COF) report was bullish. Feedlots in September placed 4.6% fewer cattle than last year. That was better than the trade's expectation of +0.1% (ALDL +0.2%). The 2.051 million head placed was under last year's 2.150 for that month. It was only moderately over the five-year average of 1.998 million. This stops four months in a row of higher than last year placements. This also eases some of the concern that we, and others, had about repeating last year's heavy September to November placements. Analysts are generally highly focused on this September to November placement issue as this is the largest three month placement period of the year. It is the reason why there is the seasonal dip in prices in the summer. September placements determine a part of the March to early August slaughter numbers.

Marketings of finished cattle during September ran 3.6% under last year. That was below the -3.0% average trade guess (ALDL -0.7%). A smaller than expected marketing is slightly bearish for front month cattle (implying more cattle to market during October). At 1.719 million head, this number was the smallest September in three years. It was right next to the 1.706 five year average for this month.

Today's report didn't fix the overall large supply issue, but it did help. The total number of cattle still in feedlots as of October 1 came to 5.4% over last year. That was under the +6.4% trade estimate (ALDL+5.9%). At 11.400 million head this is the largest October 1 number in the history of the data-series back to its 1995 start. We have had record COF for each of the past three months. It is no surprise to have a large population. We have been in expansion since 2013. On top of this, cow/calf producers stopped holding back females for the cow herd. That means in year one of the stopping expansion issue you actually have another increase in supply. That why the industry expects another increase in annual beef production in 2019.

For the week, December fed cattle futures rose by 0.70. Cash cattle already traded a few thousand head through Thursday at $110/$111 live and generally $174 dressed. Last week's trade averaged $110.52 and $173.52 on the closely followed five area report. We are not sure how aggressive packers will be buying after today's report. Wholesale beef is +5.51 through this morning for the week on choice. It is +1.58 for select. In our opinion, cash cattle should rally slightly in this fourth quarter. Whether this gain in cash cattle happens today or next week is our only question.

Speaking of reasons to rally, weekly cattle kill numbers are pretty low right now compared with previous weeks. USDA estimated this week's run at 625,000 head, a bit lower than expected. Allendale was estimating 631,000 and the other firm that estimates numbers was larger than that. This is the lowest non-holiday kill since first week of August. It was also 1.3% under last year. That is under the past six weeks that averaged 1.0% over last year. Weekly beef production, at 517.9 million pounds. was 0.7% under last year. That was lower than the past six weeks at 1.4% over.

On a separate issue, the European Union (EU) has agreed to start negotiations with the U.S. on increasing their beef imports. That is good news but not as positive as you would think. It will be for only non-hormone treated beef. It has been estimated in previous years that under 5% of U.S. beef would qualify. Additionally, the negotiation is about the amount of U.S. beef that will fit into the overall 45,000 metric tonne quota for all countries. The U.S. is down to filling about 1/3 of that quota. Since the 1981 EU decision to ban growth hormones in its beef supply, our trade with them has been very small.

Today's COF report lightens the potential supply we were fearing for the coming spring/summer. There should be some higher trade on Monday based on both the COF as well as the light supply we are seeing in the short term. Short-term speculators may want to take profit on the ALDL trade position on Monday. Longer term traders may not get too concerned as the short $112 put gives us $3.00 in potential upside at expiration before the position is challenged.

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