As we head further into fall, cattle inventories continue their return to relative normal, with most of the kinks from COVID-19 slaughter facility disruptions having worked themselves out. We see record cattle on feed, but a return to normal seasonal movements in total inventories. We have seen larger placements driven by positive margins and dryer conditions, and healthy marketings indicate slaughter has recovered well. Additionally, most in the industry believe that we have largely worked through the backlog of heavier animals in the system, though average weights still present a problem.
October Cattle on Feed Report
This report showed a total inventory of 11.717 million head for the United States on October 1, the highest October 1 inventory level since the series began in 1996. This 3.8% year-over-year increase is slightly above analysts’ expectations of an average increase of 3.2% in feedlot inventories. Large placements helped to offset the large marketings and pushed cattle on feed up 429,000 head over last year. Typically, October begins the slow buildup of animals after September lows, and this year it looks as if we are seeing this seasonality play out. After strong impacts from the pandemic in April and May, the number of cattle on feed has largely followed seasonal patterns.
Coming in at 5.9% over 2019, placements in September far exceeded the average analyst expectation of a 2.5% increase and were relatively close to the maximum analyst expectation of a 6.5% increase. The wide range of forecasts for placements – nearly 8% -- highlights the uncertainty that still exists in the market around the full impacts of COVID-19. Placements clocked in at 2.227 million head in September, the third month in a row that actual placements have outpaced industry estimates. Larger placements reflect the impact of drought in some parts of the country, as well as improving feedlot margins and a healthy availability of feeder cattle. Placements were higher for all weight categories, but a large portion was cattle in the 700-pounds-to-900-pounds range.
Marketings came in at 6.2% above last year. This is slightly above analysts’ expectations of 5.8% above year-ago levels. The 1.846 million head marketed in September marks the highest level for that month in nearly two decades. Given that there was one more working day in the month, our daily average marketings were above a year ago for the second month in a row. This translates to an ability to slaughter more cattle per day on average than last year, which is certainly welcome news considering the struggles the processing industry faced earlier this year.
Quarterly Report Data
We are also seeing quite a bit of discussion around the ratio of heifers to steers on feed, a quarterly figure that was released as well. The quarterly figures help estimate the number of heifers being retained for breeding purposes and contribute to determining the cattle cycle curve. The January beef cattle inventory was lower than the previous year, leading most to think the cattle cycle turned last year. We are able to see the impacts of the processing facility disruptions in the third quarter, with heifers on feed climbing to 38.5%, up from 37.3% in the second quarter. We can guess that heifers, which have smaller carcass weights, were held back to make room for the much heavier steers. This number has fallen in the fourth quarter, to 37.6%.
The Backlog of Heavy Animals
In September, the industry continued working through the backlog of heavier animals in the system. The inventory of cattle on feed for over 120 days is estimated to be around 3.975 million head. Figure 3 shows this number to be below last year, but above the recent average, meaning we appear to have largely worked our way through that backlog. However, slaughter weights are still trending above normal and can still drive increased beef production.
Takeaway
With plenty of animals in the pipeline for processing, the October Cattle on Feed report is considered relatively bearish. There are still quite a few moving parts in the cattle market right now. Weights will continue to be an issue as some cattle are already too big and increased weights are driving greater beef production, resulting in more meat to move through demand channels. Additionally, it will be interesting to see how the recession eventually impacts beef demand, as recessions tend to not be kind to this particular animal protein.
