The 2017 market has flickering bright lights

Lower retail prices help to fuel increased beef demand

The price outlook for fed and feeder cattle prices has improved over the past month.

First, beef production during the first half of 2017 will be lower than earlier anticipated. Second, offshore North American beef demand has strengthened in Southeast Asia due to lower exports from Australia. Third, Canadian exports of fed cattle and beef products will remain strong through the first half of 2017 due to lower U.S. imports from Australia and New Zealand. Finally, the weaker Canadian dollar and strong U.S. greenback continue to support Canadian export volumes.

Alberta packers were buying fed cattle in the range of $153 to $155 in mid-December, which was up nearly 20 per cent from the yearly lows back in September. Wholesale beef prices are percolating higher, encouraging the year-over-year increase in weekly slaughter levels. At the same time, we’re seeing a softening of retail beef prices, which has increased purchases at the meat counter.

Margins throughout the beef production pipeline are coming back in line with traditional levels. Feedlot margins are now in positive territory with Alberta breakeven pen closeouts near $145. Given the positive margin structure, feedlots have been more aggressive on feeder cattle purchases in an effort to recoup some of the losses over the past year. Larger-frame Simmental-based steers averaging 550 pounds were trading for $197 in central Alberta, while Charolais-cross steers just over 600 pounds traded for $187 in the same region during mid December.

Feed grain prices remain under pressure given the larger production of Canadian feed barley and feed wheat. A burdensome U.S. corn situation along with a sharp increase in South American corn production will continue to weigh on world feed grain prices.

U.S. fourth-quarter beef production will finish sharply above year-ago levels, however the USDA lowered production estimates for the first half of 2017 (see chart at top). Lower feedlot placements during the fall along with minor downward revisions for expected carcass weights have drastically altered the supply situation.

First-quarter beef production is estimated at 6.165 billion pounds. Second-quarter beef production is projected to finish near 6.29 billion pounds, which is down from earlier projections of 6.6 billion pounds. The futures market is now starting to factor in a risk premium due to these lower production estimates. Pork production during the second quarter will also be at a seasonal low so the overall red meat price structure for the second quarter of 2017 is not bearish, but rather has a mildly friendly sentiment. The main point is that the production fundamentals for the first half of 2017 are not bearish from current levels but rather point to higher prices.

However, beware during the third and fourth quarters of 2017. Feedlot operators will want to hedge their fall production in late March or early April because the futures markets will turn over during this time. Fed cattle prices have potential to make seven-year lows next fall given the surge in beef and pork production.

The feeder cattle outlook for the first four months of 2017 is also quite positive given the healthy margin structure of finishing feedlots. However, the feeder market may start to turn lower in late April and May of 2017 as the market factors in a surge of third-quarter beef production. Next spring, cow calf producers will likely want to take some protection on their fall 2017 marketings because the latter half of 2017 will experience sharply lower fed and feeder cattle prices compared.

About the author

Columnist

Jerry Klassen is manager of the Canadian office for Swiss based grain trader GAP SA Grains and Produits Ltd. He is also President and founder of Resilient Capital which specializes in Proprietary Commodity Futures Trading and Commodity Market Analysis. Jerry owns farmland in Manitoba and Saskatchewan but he grew up on a mixed farm feedlot operation in Southern Alberta, which keeps him close to the grassroots level of grain and cattle production. Jerry is a graduate of the University of Alberta. He can be reached at 204-504-8339.

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