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Feedlot profits drive large placements

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Strong demand for beef is padding margins for cattle feeders, encouraging feedlots to refill inventory quickly and leading to a 16 percent jump in June placements.

The latest USDA cattle on feed report caught most industry watchers off guard with a 16 percent year-over-year increase in the number of cattle placed into feedlots in June.

“Placements were surprisingly big,” said Derrell Peel, Oklahoma State University Extension livestock marketing specialist.

They were 10 percent higher than analysts had expected and pushed feedlot inventories more than 4 percent higher than June 2016, he said.

At 1.77 million head, June placements into large feedlots were up 245,000 head from a year earlier. Total on-feed numbers on July 1, at more than 10.8 million, were 465,000 above last year’s level, the USDA National Agricultural Statistics Service reported.

“Feedlots have been very profitable and have an incentive to go ahead and keep placing cattle. They placed all the heavyweight cattle they normally would place and placed lightweight cattle as well,” Peel said.

Feedlots have suffered a lot over much of the last few years, and they’re finally profitable. The price relationship between feeder cattle and fed cattle has lined up, and grain costs are low. Month-to-month estimates on returns show May was close to as high a return as the feedlot segment has ever seen, he said.

Feedlot returns in the Southern Plains are the highest in more than a decade, with the Livestock Marketing Information Center estimating average returns at $177 a head in the first six months of the year.

May has been the highest month so far this year, showing a profit of $260 per head, and June followed at $208 a head, according to LMIC.

“This is in stark contrast to the last two years of negative returns, which were estimated as deep as $500 per head in late 2015,” Katelyn McCullock, American Farm Bureau economist, said in LMIC’s July “In the Cattle Markets” report.

The high returns have encouraged feedlots to refill inventory quickly this year in the wake of aggressive marketings, and analysts are expecting high placements to continue, she said.

June was the fourth consecutive month of large placements, with feedlots dipping into the feeder-cattle supply pool a little early, Peel said.

Even though the underlying supply continues to get a little bit bigger and more feeder cattle are in the pipeline, feedlots have been tapping into future supplies. Into the fall, year-on-year increases in placements are likely to be smaller, he said.

In general, marketing of fed cattle is at a good pace — 4 percent higher in June than a year earlier. That’s why the cattle on feed number hasn’t increased more than it has. But with large placements the last four months, marketing is not quite keeping up with the number of cattle going into feedlots, he said.

Feedlot returns will likely shrink in the second half of the year and could turn back to the red by the end of 2017, McCullock said.

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