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Producers urged to sell earlier this fall

Market Update: Market expected to go lower heading into the fourth quarter of 2017

Alberta packers were buying fed cattle in the range of $159 to $163 in late June, down from highs during the first week of May of $197. The market has come under pressure as market supplies build on both sides of the border and carcass weights increase.

U.S. cattle-on-feed numbers reached a historical high on June; placements have sharply exceeded year-ago levels over the past three months. Large feedlot inventories have confirmed that beef production will reach burdensome levels in the third quarter.

Wholesale beef prices have also dropped from the May highs with the larger beef production coming on stream. Beef demand has been bolstered by a strong overall economy. Robust consumer spending has enhanced beef consumption.

Feedlot inventories are at 10-year highs. Earlier in spring, carcass weights were declining. The live cattle futures were trading at sharp discount to the cash, causing feedlots to be extremely aggressive on marketings. This caused beef production to come in lower than anticipated in the second quarter. We’ve now seen the tide turn. Marketing weights are increasing but one positive aspect is that feeding margins remain favourable. Despite the lower prices, producers continue to be aggressive on sales and feedlots remain current with production.

Canadian numbers

Cattle on feed in Alberta and Saskatchewan as of June 1 were 881,445 head, up five per cent from June 1 of 2016. Placements during May were 121,548 head, up a whopping 165 per cent from last year. Most of the placements were under 800 pounds so the bulk of these placements will come on the market in the fourth quarter.

Looking forward, the surge in U.S. third-quarter beef production will have two major implications for the Canadian market. First, exports to the U.S. of slaughter steers and heifers will drop to a trickle. Secondly, exports of wholesale beef will also slow down. This means that additional beef supplies will have to be absorbed in the Canadian domestic market or priced into other offshore destinations. Alberta fed cattle basis levels will likely deteriorate in the latter half of 2017. I’m somewhat bearish on the fed cattle market into the third and fourth quarters. The price outlook is shaping up to be similar to 2015.

Western Canadian feedlot margins have ranged from $200 to $300 per head in June. Feedlot operators bid up the price of feeder cattle until margins are at break-even and it now looks like margins in the fourth quarter will drop into negative territory. Feeder cattle prices are expected to trade sideways through the summer and fall. However, the market will likely trend lower in November and December. Cow-calf producers will want to be aggressive with their fall marketings. Sell earlier rather than later.

Western Canadian barley prices are expected to strengthen by $30/mt to $40/mt next winter, which will add about $50 to $60 per head of input costs. Feedlots will calculate their feeder purchase accordingly.

We’ve seen a very unique market structure in the first half of 2017. Basis levels for fed and feeder cattle have been abnormally strong for an extended period. This will not continue because feedlot inventories are too high. Readers who recall my articles from last winter know that producers want to sell a strong basis. I want to remind producers that weekly updates on the feeder cattle market can be found every Tuesday on the agcanada.com website. I enjoy the feedback and phone calls, but visiting the website may be helpful for short term marketing decisions.

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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