January 1 Cattle Inventory  

Last Friday, USDA released the annual Cattle report – their estimate of the January 1 inventory of various classes of cattle.  The headline numbers in the report include a couple of rather striking points.  First, the All Cattle and Calves inventory, at 87.7 million head, is the lowest since 1951.  Second, the All Cows and Heifers that have calved inventory, at 38.3 million head, is the lowest since 1941.  These inventories include both beef and dairy cattle.  Dairy cattle numbers have declined markedly over the past few decades due to dramatic improvements in productivity in that sector.  Consider this: the January 1 inventory of dairy cows in 2014 was just over 9.2 million head.  In the decade of the 1950s, the inventory of dairy cows averaged over 22.3 million head.  Focusing on beef cattle, the January 1 inventory of beef cows, at just over 29.0 million head, is the smallest since 1962.

The January 1 beef cow inventory was 0.9% smaller than a year ago; so the widely expected result of another year of contraction in 2013 was confirmed.  Last year marked the eighth consecutive year of declining beef cow numbers.  In fact, beef cow inventories have been down in all but two years since 1996 – 2005 (up 0.4%) and 2006 (up 0.1%).  But perhaps the most notable thing about the inventory report was that the beef cow inventory, though down, was down by quite a bit less than expected.  Pre-report estimates generally anticipated about a 1.5% decline in beef cow inventory.  In that context, the actual decline was pretty small, suggesting that by late last year, producers were indeed beginning the process of herd rebuilding.  Low rates of beef cow slaughter in the last quarter of 2013 are consistent with this story as well.

While herd rebuilding may be in its beginning stages in the beef sector, it will be a slow process given the historically small number that the herd will be rebuilding from.  In addition, very strong feeder cattle prices are making it quite costly for producers who want to expand to hold replacement heifers.  The inventory number for beef replacement heifers hints at this dilemma.  Heifers over 500 pounds held for beef replacement numbered 5.47 million on January 1.  This was an increase of 1.7% over the prior year; however, the pre-report expectation was that beef replacement heifers numbers would be up by more than 3%.

A final note on the Cattle report is that it clearly illustrates how tight calf supplies are right now.  The inventory of cattle on feed is down 5% from the prior year and at 12.695 million head is the lowest January 1 inventory since 1995’s 12.4 million.  But the inventory of available calves outside of feedlots (calculated by summing other heifers over 500 pounds, steers over 500 pounds, bulls over 500 pounds, and all calves under 500 pounds and then subtracting the on-feed inventory) is still more striking.  The calculated inventory of calves outside of feedlots is just 26.8 million head, down 2.6% from a year ago.  In historical context, this begins to look like a really small number.  For example, note that in 1995 when the on-feed inventory was 12.4 million head, the inventory of calves outside of feedlots was just over 35 million – almost 25% larger than today’s.  This, of course, has serious implications for feedlots, packers, other downstream firms, and input providers who must compete for their share of this business.

Apropos of the preceding point, National Beef announced last week that they would be closing their Brawley, California beef packing plant in early April.  From the press release announcing the closure:

A declining supply of fed cattle available for the Brawley facility was a key driver of the decision to close the plant, said Tim Klein, chief executive officer National Beef. 

This closure follows by about a year the closure of Cargill’s Plainview, Texas processing plant.  This is what the process of matching capacity to the industry’s needs will look like.

The Markets

As all good things must come to an end, so the fed cattle market’s impressive string of record highs ended last week.  The 5-Area weekly weighted average price for last week worked out to $145.34, down $2.88 from the prior week.  Cattle feeders did not go down without a fight, though.  The volume of negotiated sales was quite low, with sales of just under 57,000 head reported for the week as feeders seemed content to see what this week will bring for many of the cattle on last week’s show lists.  Wholesale beef prices won’t be providing as much support as has been the case recently.  Friday’s Choice boxed beef cutout value worked out to $223.49; down by more than $13 from the previous Friday.  The Select cutout has held up a little better and worked out to $224.85 Friday.  Note that that results in a CH/SE spread of -$1.36.  It’s not unusual for the daily spread to be slightly negative for a day or two in early spring.  What is notable is how early the spread has narrowed this year as well as how large the negative spread was on Friday.  Feeder and stocker cattle prices around the country were called unevenly steady to $3 lower in last week’s National Feeder and Stocker Cattle Summary report.

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Source: John D. Anderson, Deputy Chief Economist, American Farm Bureau Federation