Sort & Cull

Moments before USDA unveiled the semi-annual cattle herd count last Friday, I was feeling rather apathetic about the pending report's bearish potential. For one thing, these twice-a-year assessments have seldom been known as market-movers. Such "long views" may command the headlines for a day or two, but for the most part they are quickly trumped by more immediate considerations.

Additionally, the very nature of such "big picture" reports typically lends them less credibility among analysis and traders (i.e., the bolder the assumptions, the more dubious the conclusions and implications)

But I suppose the real reason for my pre-report yawns was the belief that Washington would most probably confirm general expectations of modest expansion. Furthermore, even if the official January 1 gate turned out to be significantly larger than anticipated by the trade, so I thought, extreme bearishness had already been dialed into the board thanks to the post-holiday market crash.

Normally, you would think that a price drop of 1800 points prior to a major report (i.e., from early January high to late January low, basis April feeders) would be more than adequate to gird your loins for a worst-case scenario from NASS. Apparently not this year.

Since the official confirmation of larger-than-expected herd expansion late last week, most feeder contracts have imploded by an additional 850 points plus. I guess my pre-inventory cocktail should have a combination of Jolt, Red Bull and espresso.

Given the fact that the January 1, 2014, cow herd was estimated to be 1% smaller than the previous year, it was more than a little tough to predict a 2014 calf crop as large as 33.9 million head, nearly 2% larger than 2013 (i.e., up 170,000 head). For the record, this represented the first time since 1995 that calf production has exceeded the previous year.

So how do you start the year with fewer "cows that have calves" and end the year with a larger calf crop? I guess you have to credit at least three factors: 1) A significant number of first-time mother in 2014; 2) A higher calving rate; and 3) An extra special twist of USDA math (e.g., death loss assumptions, slaughter ratios, etc).

One could argue until blue in the face, but the number is what it is. While I don't think many are worried about extra beef tonnage anytime soon, the neutering of the bullish supply factor is just something we didn't need to happen in an early year market context that's turned out to be extremely defensive.

(AG)