Drought hits U.S. cattle numbers, forces hog sales

CHICAGO Wed Sep 19, 2012 5:54pm EDT

CHICAGO (Reuters) - This summer's historic drought and record feed grain prices prompted cattle feedlots to cut August purchases to the lowest since 2008 and forced hog producers to rush animals to slaughter swelling pork supplies.

The impact on prices may differ in the short-term, with the glut of pork products weighing on prices now, but both portend higher meat costs down the road as breeders and ranchers reduce the number of animals they feed to blunt painful feed costs.

The U.S. Agriculture Department's cattle-on-feed report due on Friday is expected to show that the number of animals entering feedlots, called placements, could fall 6 percent from last year to 2.111 million head, the smallest since 2008.

A separate USDA report that day is expected to show pork supplies increased in cold storage warehouses last month. The hog slaughter a week ago was the highest in 4-1/2 years, and in August the number of hogs processed into pork rose 4 percent. Beef stockpiles could be the third-highest on record, one analyst said.

"U.S. beef stockpiles tend to rise during the second half of the year, but that hasn't been the case in 2012 with substantially reduced cattle and beef production apparently falling short of global demand," said Vaught Futures Insights president Dan Vaught.

LIQUIDATION

High-feed costs discouraged feedlots from adding cattle in August and years of herd liquidation reduced the number of young cattle that were available, analysts said. Also, August placements a year ago were unusually large because a drought in the southern plains forced more cattle into feedlots.

"Placements are going to be down compared with a year ago, because of larger drought-induced placements then (2011) in the southern Plains. Also, factoring into the lower August placements this year is we had a smaller calf crop and smaller feeder cattle supply," said Erica Rosa-Sanko, economist at the Livestock Marketing Information Center.

Cattle are fattened in feedlots for four to five months and then processed into beef.

"Overall, these tighter (cattle) supplies will translate to less beef supplies down the road," said Rosa-Sanko.

The wide range of placement estimates, down nearly 12 percent to up 2.4 percent, reflect the various forces at work in the industry last month, said LMIC economist Jim Robb.

While August usually marks the beginning of ramped up cattle placements, back-to-back droughts devastated the livestock industry by driving corn prices to record highs, destroying pastures and doubling prices for hay.

As a result ranchers continued to downsize herds. Despite the urgency to move cattle into feedlots, the smaller herds after years of herd liquidation likely meant fewer cattle were placed in August versus a year ago.

Vaught forecast the number of cattle moved into feedlots last month down 2 percent from a year ago. He said strong cattle futures prices for December 2012 and in 2013 gave ranchers incentive to hold on to their animals as long as possible.

Analysts estimated the feedlot cattle supply as of September 1 at 10.679 million head, down 0.1 percent from a year ago and down 1.1 percent from the prior month.

The government report is also expected to show cattle marketings last month down 1.6 percent at 1.978 million head.

HOGS MARKETINGS SURGE

Hog were rushed to market in August, due in part to the high feed costs, causing a 4 percent increase in the number of hogs processed into pork. That continued in September, with last week's hog slaughter estimated to be the highest in 4-1/2 years

USDA estimated last week's U.S. pork production at 488.7 million lbs, up nearly 6 percent a year earlier. Year-to-date pork production is estimated up 2.3 percent.

"This time, we've slaughtered so many hogs and have had a big overrun in pork production, it will be something to pay attention to," said University of Missouri livestock economist Ron Plain.

Also, contributing to a larger pork supply was a cooler August versus July's torrid heat. Hogs recovered in August and quickly gained weight. The combination of more and heavier hogs put an estimated 5 percent more pork on the market last month, pulling down hog and wholesale pork prices, analysts said.

"I suspect we are going to see some pretty hefty amounts as a large portion of this recently produced pork from the massive slaughters is going to be stuffed into storage," said hog futures trader Dan Norcini.

Independent market analyst Bob Brown said beef inventories could become the third largest on record for August as tight supplies and the stronger dollar may have limited exports. Also, beef stocks typically increase seasonally during the month of August, he said.

(Editing by Bob Burgdorfer)

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