Cattle on Feed Report Offers Supply Surprise

U.S. beef supply shrinks more rapidly than expected, all key numbers in Friday’s USDA report are friendly to fed and feeder cattle futures

A smaller than expected May 1 feedlot inventory turned up in Friday’s USDA Cattle on Feed Report. Lower than expected April placements is one reason for the smaller inventory. April marketings also came in larger than expected. The result - feedlot inventories are shrinking from both ends.

Feedlots inventories climbed sharply last summer when drought in the Southern Plains pushed cattle into feedlots prematurely. Cattle on feed climbed 7.1% last August and have been high since. Larger feedlot inventories from the summer 2011 surge do not mean a larger cattle supply. One reason is cattle placed at lighter weights are on feed longer. They get counted on more Cattle on Feed Reports, thereby inflating the inventory.

Since December 2011, feedlots placed 600,000 fewer cattle than a year earlier. That trend will likely continue. The result will be feedlot inventories well below year-earlier levels by the end of summer.

Cheaper wheat and relatively high-priced cattle suggest cattle currently grazing wheat could stay on those pastures longer.

Number of cattle in feedlots does not set the supply of cattle available. Rather it indicates how the cattle supply is flowing. Size of the cow herd determines cattle supply. The current cow herd is the smallest herd in more than 50 years.

Signs exist that cow-calf operators are expanding their cow herds. But it will take several years before more beef is available to market.

USDA confirming tighter supplies comes just as cattle markets are gaining traction going into grilling season, after a spring racked with high gasoline prices, controversy over lean finely textured beef and a dairy cow turning up with BSE in California.

Pit-traded June fed closed Friday up $1.60 at $119.52, extending a sharp five-day rally. The day's gains translate to the highest closing price since April 23 for a front-month contract. That was the day before word of the California BSE cow surfaced. Cattle futures have gained 3.7% over the past five trading sessions. Cattle for August closed up $1.87 at $121.92.

After pit trade closed, August advanced to $122.10. October fed cattle improved to $126.60.

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