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Cattle markets expected strong through ‘til fall

Consumer spending appears to have an appetite for meats

Fed and feeder cattle markets across Canada continue to trade at historical highs on the heels of very strong beef demand. Alberta fed cattle prices continue to hover in the range of $200 to $202 per cwt; higher quality Charolais cross steers averaging 700 pounds are reaching above $300 across Western Canada.

Improving consumer incomes appears to be sustaining beef consumption levels while absorbing larger pork and poultry supplies. Wholesale beef prices reached all time highs in mid May supporting fed cattle prices which spilled over into feeder markets for all weight categories.

Cow-calf pairs also reached up to $5,000 as producers look to expand herds. The beef complex is functioning to encourage production while price levels are not high enough to curb demand. I’ve received many inquiries regarding the price outlook for the cattle market and as long as we don’t see any slowdown in the economic situation, the markets are expected to stay firm through the summer and fall.

Money in their pockets

Disposable income for the average North American continues to climb. The U.S. unemployment rate dipped down to 5.4 per cent in April and has potential to improve into the summer. At the same time, consumer confidence reached up to pre-recession type levels enhancing the outlook for consumer spending over the next three to four months. Seasonally, equity markets usually trend lower during May and June but this year major stock indexes have held value with positive economic data reinforcing the price structure. U.S. consumer away-from-home food spending during April jumped a whopping 10.7 per cent over year-ago levels and we will likely see similar numbers for May and June. People are eating out more after the long drawn out winter. The at-home-food spending is similar to year ago levels during early spring. The demand equation is fairly favourable moving forward. The only concern is the markets may have factored in all the positive fundamental factors. Unless we see further improvements in the above statistics, it may be difficult for wholesale beef and fed cattle prices to make considerable gains above current levels.

The USDA increased their beef and pork production estimates for 2015 on their May report. Each quarter showed marginal upward revisions for 2015 which reflects that supplies are not tightening but rather coming in larger than anticipated. This is largely due to heavier carcass weighs which are running 25 pounds above year ago levels. Note, in the accompanying table, the first estimates for 2016 were also released with both pork and poultry showing year-over-year increases. U.S. cattle on-feed inventories as of April 1 were similar to year-ago levels and analysts are expecting May and June inventories to also be equal with 2014.

Canadian production down

Canadian beef production for the week ending May 9 was 339,145 mt, down five per cent from last year. We will likely see this trend continue into the summer months due to year-over-year decrease in cattle on-feed numbers in Alberta and Saskatchewan. The number of cattle on feed in these two provinces as of April 1 was down 11 per cent compared to April 2014, but carcass weights are also running 30 pounds above year ago levels.

Feedlot margins remain in healthy territory with the fed cattle market trading $200. Breakeven pen closeout prices are in the range of $186 to $188 for May and June and then edge higher to $192 later in summer. This has allowed feedlot operators to bid up feeder cattle prices, which took a $20 jump through the March timeframe.

We have since seen prices remain firm but volatile at the higher levels. Many major operations are using wheat in the rations instead of barley. Feed wheat was trading at $200/mt delivered in the Lethbridge area in mid-May while feed barley was near $208/mt. Low quality milling wheat is also moving into feed channels as the domestic feed market is above world milling prices for mid protein wheat.

Beef consumption is expected to stay strong through the summer due to positive economic conditions, which favour increased consumer spending. Fed cattle prices are expected to hold value despite the marginal increase in U.S. beef production. A stronger Canadian dollar may temper the upside but I’m not expecting a major change in the exchange rate. Feeder cattle prices are expected to trend higher due to favorable feedlot margins. Feed grain prices appear to be somewhat bearish late in summer baring any adverse weather.

About the author

Columnist

Jerry Klassen manages the Canadian office of Swiss-based grain trader GAP  SA Grains and Produits Ltd., and is president and founder of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204 504 8339.

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