The Jan. 1 beef cow inventory was 0.9 percent smaller than a year ago, so the widely expected result of another year of contraction in 2013 was confirmed. Last year marked the eighth consecutive year of declining beef cow numbers. In fact, beef cow inventories have been down in all but two years since 1996-2005 (up 0.4 percent) and 2006 (up 0.1 percent). But perhaps the most notable thing about the inventory report was that the beef cow inventory, though down, was down by quite a bit less than expected.

Pre-report estimates generally anticipated about a 1.5 percent decline in beef cow inventory. In that context, the actual decline was pretty small, suggesting that by late last year, producers were indeed beginning the process of herd rebuilding. Low rates of beef cow slaughter in the last quarter of 2013 are consistent with this story as well.
 
While herd rebuilding may be in its beginning stages in the beef sector, it will be a slow process given the historically small number that the herd will be rebuilding from. In addition, very strong feeder cattle prices are making it quite costly for producers who want to expand to hold replacement heifers. The inventory number for beef replacement heifers hints at this dilemma.

Heifers over 500 pounds held for beef replacement numbered 5.47 million on Jan. 1. This was an increase of 1.7 percent over the prior year; however, the pre-report expectation was that beef replacement heifers numbers would be up by more than 3 percent.
 
A final note on the Cattle report is that it clearly illustrates how tight calf supplies are right now. The inventory of cattle on feed is down 5 percent from the prior year and at 12.695 million head is the lowest Jan. 1 inventory since 1995's 12.4 million. But the inventory of available calves outside of feedlots (calculated by summing other heifers over 500 pounds, steers over 500 pounds, bulls over 500 pounds, and all calves under 500 pounds and then subtracting the on-feed inventory) is still more striking.

The calculated inventory of calves outside of feedlots is just 26.8 million head, down 2.6 percent from a year ago. In historical context, this begins to look like a really small number. For example, note that in 1995 when the on-feed inventory was 12.4 million head, the inventory of calves outside of feedlots was just over 35 million – almost 25 percent larger than today's.This, of course, has serious implications for feedlots, packers, other downstream firms, and input providers who must compete for their share of this business.
 
Apropos of the preceding point, National Beef announced that it would be closing its Brawley, California, beef-packing plant in early April. From the press release announcing the closure: "A declining supply of fed cattle available for the Brawley facility was a key driver of the decision to close the plant, said Tim Klein, chief executive officer National Beef."
 
This closure follows by about a year the closure of Cargill's Plainview, Texas processing plant. This is what the process of matching capacity to the industry's needs will look like.

The markets
As all good things must come to an end, so the fed cattle market's impressive string of record highs ended last week. The 5-Area weekly weighted average price for last week worked out to $145.34, down $2.88 from the prior week. Cattle feeders did not go down without a fight, though.

The volume of negotiated sales was quite low, with sales of just under 57,000 head reported for the week, as feeders seemed content to see what this week will bring for many of the cattle on last week's show lists. Wholesale beef prices won't be providing as much support as has been the case recently. Friday's Choice boxed beef cutout value worked out to $223.49; down by more than $13 from the previous Friday. The Select cutout has held up a little better and worked out to $224.85 Friday.

Note that that results in a CH/SE spread of -$1.36. It's not unusual for the daily spread to be slightly negative for a day or two in early spring. What is notable is how early the spread has narrowed this year as well as how large the negative spread was on Friday. Feeder and stocker cattle prices around the country were called unevenly steady to $3 lower in last week's National Feeder and Stocker Cattle Summary report. 

John D. Anderson is a deputy chief economist for the American Farm Bureau Federation. This appeared in the In the Cattle Markets e-newsletter for Livestock Marketing Information Center.