Relatively thinly traded feeder cattle futures jumped more than one per cent after the U.S. Department of Agriculture released its monthly Cattle on Feed report at midday, and those gains pushed up more the actively traded live cattle market.

“When I started seeing the rally late, I think it was led by the feeder cattle. The deferred live cattle caught a little fire with that,” said one U.S. futures trader.

Chicago Mercantile Exchange August feeder cattle settled up 1.625 cents at 144.925 cents/lb., the highest since May 7 (all figures US$). The weekly percentage gain of more than five per cent was the largest in the contract’s history.

Most-active CME August live cattle finished 0.525 cent higher at 102.3 cents/lb.

While the USDA report underscored abundant U.S. cattle supplies, declines in placements of cattle in feedyards declined by about eight per cent in April. That suggested that feedlots might need to buy cattle to fill up their pens.

And even as the total supply of cattle on feed was up about five per cent, new supplies available to bring into feedyards was beginning to tighten, the traders said.

“We are going to have a hard time finding animals,” said Zaner Ag Hedge analyst Ted Seifried. “The supply is going to dry up a little bit.”

The Cattle on Feed report was relatively in line with pre-report analyst estimates. The data showing large supplies on its own could be perceived as bearish but many had prepared for it.

“A lot of times we get these slightly bearish reports that come out as expected, and we rally from there,” Seifried added.

Cash cattle after the report fetched about $110/cwt in Kansas and Nebraska — sales that were down $5 to $6 from a week ago, suggesting limited demand for the moment from beef packers.

Lean hog futures were little-changed in muted trading ahead of the three-day U.S. Memorial Day holiday weekend.

CME July hog futures finished 0.775 cent higher at 77.55 cents/lb., keeping within the wider trading range established Thursday.

— Michael Hirtzer reports on commodity markets for Reuters from Chicago.

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Persistent drought in the U.S. Plains withered winter wheat grazing pastures, which forced beef cattle into feedyards in states noted for growing corn such as Iowa and Kansas, said analysts.

“This is a dry weather story… and not great news for the trade,” said Allendale Inc chief strategist Rich Nelson, regarding USDA’s placement result that was near the high end of the range of analysts’ forecasts.

Larger cattle numbers means more beef tonnage around the late summer and early fall period, said Nelson.

Another factor behind February’s placement buildup was that packers paid feedlots enough for their cattle to turn a profit, which allowed them to buy calves to fatten, analysts said.

Monday’s Chicago Mercantile Exchange live cattle futures may open lower based on Friday’s report, said analysts.

But substantial market losses on Friday, partly tied to trade war fears, might lessen some of the report’s bearish implications, said analysts.

Most of Friday’s futures sell-off was on worries about a potential trade war between the U.S. and China in addition to increased near-term supplies, said Nelson.

“But I think there is more to go,” said Nelson regarding potential further market weakness come Monday.

USDA’s report showed February placements at 1.817 million head, up from 1.694 million a year earlier and above the average forecast of 1.766 million.

It was the largest placement result for the month of February since 1.82 million in 2002, according to analysts.

The government put the feedlot cattle supply as of March 1 at 11.715 million head, up 8.8 per cent from 10.772 million a year ago. Analysts, on average, forecast a 8.2 per cent increase.

USDA said the number of cattle sold to packers, or marketings, were up 1.6 per cent in February from a year ago to 1.675 million head.

Analysts had projected a 1.2 per cent rise from 1.648 million last year.

Katelyn McCullock, senior economist with the Livestock Marketing Information Center, said the southern Plains continued to see some drought impacts based on lighter-weight animals going into feedlots — including feeder cattle arriving from Mexico.

“The cattle that are coming in across the border are going straight to feedlots as opposed to onto pasture or on some forage,” said McCullock.

— Reporting for Reuters by Theopolis Waters in Chicago.

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Dwindling profits for feedyards, after being paid less for their cattle by packers, discouraged them from buying calves for fattening on their way to beef processors, said analysts.

They said fewer cattle are now winding up in commercial feeding pens after ranchers rushed them to market earlier than they had planned to avoid lower prices expected in the coming months amid increased supplies.

Cattle that entered feedlots in July could begin arriving at packing plants in early 2018.

On Monday, Chicago Mercantile Exchange live cattle futures could open higher in response to the report’s bullish placement outcome, the analysts said.

USDA’s report showed July placements at 1.615 million head, up from 1.572 million a year earlier and below the average forecast of 1.67 million. Still, it was the largest July placement figure since 1.684 million in 2013.

The government put the feedlot cattle supply as of Aug. 1 at 10.604 million head, up 4.3 per cent from 10.165 million a year ago. Analysts, on average, forecast a 4.7 per cent increase.

USDA said the number of cattle sold to packers, or marketings, were up 4.1 percent in July from a year ago, to 1.784 million head.

Analysts had projected a gain of 4.9 per cent from 1.713 million last year.

“Cattle feeders are facing clear losses in the months ahead due to their very heavy placement schedule in the previous eight months,” said Allendale Inc chief strategist Rich Nelson.

The Denver-based Livestock Marketing Information Center calculated that feedlots in July, on average, made a profit of $40 per steer sold to meat companies versus $84 the month before (all figures US$). They project August margins at minus $20 per head.

Friday’s report will ease some concerns about supplies during the first half of 2018, but does not change the outlook for significant cattle numbers during the fall, said Nelson.

Texas A+M University economist David Anderson agreed that “pulling cattle ahead” left fewer animals placed into feeding pens in July — which historically tends to top June placements.

He pointed out that some feedlot placements in Corn Belt states rose, partly due to livestock that continue to be displaced by drought in the Northern Plains.

— Theopolis Waters reports on livestock markets for Reuters from Chicago.

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Minnesota-based Cargill struck a deal to sell its last two feed yards to ethanol producer Green Plains for US$36.7 million, after selling other feedyards to Friona Industries last year, according to the companies.

Cargill’s withdrawal from the feeding business highlights a change in priorities at the company, which says it is the world’s largest supplier of ground beef.

Cargill wants to expand its North America-based protein business by exploring plant-based protein, fish and insects, along with other opportunities linked to livestock and poultry, spokesman Mike Martin said.

The sales of feed yards to Green Plains and Friona frees up hundreds of millions of dollars annually in working capital used to purchase cattle, he said.

Cargill in recent years has refocused its operations by exiting some lower-margin businesses and expanding into higher-margin endeavours such as food ingredients and aquaculture. It sold a U.S. agriculture retail business to Agrium last year and its U.S. pork assets to Brazilian meatpacker JBS in 2015.

Other agricultural companies, including U.S. meat processor Tyson Foods, have also shifted toward higher-margin products to increase profits and distance themselves from gyrations in commodity prices.

“The driver from a Cargill perspective is how they can best deploy capital and they’ve decided not in cattle feeding but in further processing,” said Jim Robb, director of the Livestock Marketing Information Center.

Last year, Cargill bought a ground beef processing plant in South Carolina to target sales to retail and foodservice customers on the U.S. East Coast.

Green Plains will supply cattle to Cargill for processing through a multi-year agreement, according to the companies. The two yards it is buying have a capacity of about 155,000 cattle.

The deal will make Green Plains Cattle Co., a subsidiary of the ethanol producer, the fourth largest U.S. cattle-feeding operation, with capacity of more than 255,000 head, according to the company.

By buying the feedyards, Green Plains gains markets for its distiller’s dried grains (DDGs), an ethanol byproduct used to feed livestock.

“The ability to effectively control our feed supply cost provides our cattle business with a strategic operating advantage,” CEO Todd Becker said in a statement.

The companies said the deal is expected to close by the end of May.

— Reporting for Reuters by Tom Polansek and Theopolis Waters in Chicago.

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