Market Outlook
Peak inventoryBy Dennis Smith
The USDA cattle-on-feed report issued on Friday, Nov. 22 showed on-feed inventory at 11.986 million head. This was up 386,000 from Oct. 1 and even with inventory one year ago. Placements during October were up 5% with marketings also up 5%. But the industry placed more cattle than marketed, pushing total inventory higher over the 30-day period. In my opinion, and evidently the opinion of the futures market, we’re looking at a peak on-feed inventory for months and possibly for years to come.
Allow me to explain. Beef packers have done a masterful job of controlling throughput during 2024. They’ve managed to slow the chain speed, curtailing production with the intent of preventing wholesale beef from dropping severely and also to prevent the cash steer market from surging higher. In the face of the smallest calf crop in history, packers have managed to prevent a sharp decline in on-feed inventory. Drought during most of 2024 has kept placements high and large imports of feeders from both Mexico and Canada have also been a factor.
So, as of Nov. 1, there is no shortage of fed cattle supplies. In addition, weights are record heavy, by packer design, keeping overall production from falling. However, mathematically, keeping placements from dropping severely is going to be impossible. As the inventory of feeders outside the feedyard drops to record low levels, there’s simply no way to avoid declining placements moving into 2025.
Mexico has been suffering from an even more severe drought that we have, forcing calves north at an accelerated rate. Feeder imports from Mexico are up 21% versus last year. Now, with an outbreak of screwworm confirmed in southern Mexico, all imports of cattle have been shut down. The closure may not last long but if additional outbreaks occur, at some point during 2025, the border could be shut down until further notice. Screwworm outbreaks have skyrocketed in Central America and it’s now up to Mexico to demonstrate a willingness to control their southern border.
The other key variable that will likely contribute to lower trending placements is rain in the Plains. The southern Plains have just witnessed one of the wettest Novembers ever recorded. Winter wheat ratings have jumped from 38% good to excellent to more than 50% good to excellent. In other words, everyone is going to have wheat and grass for grazing this winter. Because adding pounds on grass is far cheaper than adding pounds on a grain ration, cattle owners will take full advantage of beautiful grass and wheat.
In my opinion, on-feed inventory at 11.986 million, is the high-water mark. Numbers will decline from there not only for months for possibly for years. Demand and concerns about demand will be evident into next year and beyond.
The basic fact is that beef production is going to drop so severely that the function of prices will be to ration the tight supply. Beef will be consumed by the highest bidder. This will likely boil down to the high-end restaurant business and the export market. Middle to low-income consumers will be forced to consume mostly ground beef, pork and chicken. For many, beef will become a luxury item.
Beef packers aways have a bag of tricks to remain profitable in difficult times. As mentioned above, one of their effective tools has been slowing chain speed and forcing cattle weight to record heavy levels. However, this may be one of the last tools in the toolbox. Closing beef plants will be the final tool but this likely won’t happen until production drops sharply and prices are much higher.
The key for beef producers moving forward will be controlling replacement costs. Feeder prices are likely headed for record high territory in 2025.
Smith is a full service commodity broker specializing in grain and livestock trading with Archer Financial Services, Inc.
