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Sell calves early or hold them until spring

Market Update: Big U.S. calf crop will hit the market in November and December

Alberta fed cattle prices were hovering in the range of $143 to $145 in mid-August. The market has been trending lower since the first week of May when the fed market reached up to $197.

Despite the softer selling prices, feeding margins remain in positive territory. Break-even pen closeout values are near $135 for August; therefore, margins are hovering around $100 per head. Feeder cattle markets have held value despite the narrowing feeding margins. There haven’t been many yearlings come on the market throughout the summer but larger frame medium flesh steer calves averaging around 700 pounds have been trading from $213 to as high as $220.

The cattle complex is digesting the sharp year-over-year beef production increase during the third and fourth quarters. Beef demand moves through a seasonal low during September and October so the nearby fundamentals are bearish. Feedlots have been quite profitable for the first half of the year but we could see margins move into negative territory later in September. This could weigh on the feeder market later in the fall period. Looking forward, the U.S. cattle herd continues to expand so 2018 beef production will exceed 2017 and the market will function to encourage demand through lower prices.

U.S. herd continues to expand

The USDA released their semi-annual cattle inventory report on July 21 and the 2017 calf crop was estimated 36.5 million head, up 3.5 per cent from the 2016 calf crop of 35 million head. The last time the U.S. calf crop was this large was back in 2007 when it reached 36.8 million head. We haven’t seen a sharp increase in the cow slaughter and the feeder prices during the first half of the year have sustained the profitable period in the cow calf sector. The 2017 Canadian calf crop is expected to come in at 4.4 million head, up about 50,000 head from 2016.

U.S. cattle on feed inventories have been running four to five per cent above year ago levels; the weekly slaughter pace is exceeding last year by about 30,000 head per week. Carcass weights have been percolating higher but remain under year-ago levels. Beef production during the third and fourth quarters will be sharply above last year. However, production tends to ease in the first quarter of 2018. I’m expecting the fed cattle market to follow a very similar seasonal tendency based on the production estimates above.

Stronger beef demand has been the main factor sustaining the current price structure. U.S. and Canadian unemployment levels continue to decline while GDP data comes in stronger than expected. Disposable income for the average North American income has been rising as consumer confidence hovers near historical highs. Therefore, rising consumer spending continues to drive demand.

Markets to weaken later

Feeder cattle prices are expected to remain firm through September and October but then soften later in fall and winter. The yearling market will divorce from fed cattle prices because feedlots have experienced a prolonged period of profitable margins. Yearling numbers will be similar to year-ago levels so the market will be rather hot in September. Cow-calf producers with yearlings will want to sell into this demand. Once the feeding margins move into negative territory in November and December, the feeder market is expected to soften.

Producers marketing calves this fall will also want to sell earlier, rather than later. If you were planning to sell in November and December, the economics suggest it will probably be better to background the lighter calves and sell them as yearlings in March or April of 2018. You’ll want to avoid selling calves when the bulk of the U.S. calf crop comes on the market in November and December. The premium for calves over yearlings will likely narrow during this time. The next seasonal wave of feeder cattle pressure is in April, when the feeders move off small grain and winter wheat pasture. The fed cattle market also tends to make a seasonal high in late March. Backgrounding operators will want to bide their time. Don’t be aggressive on purchases early in the season because calf prices are expected to soften late in the year.

Barley and feed grain prices are expected to strengthen after the harvest period. This will also set a negative tone for the yearling market as feedlot operators factor in a higher cost-per-pound gain. Similarly, I don’t feel this rally in the Canadian dollar is over and we could see further appreciation against the greenback during the September through December timeframe. These two factors also favor selling feeder cattle earlier in fall, rather than in late fall or early winter.

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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