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Feeder red ink will affect fall calf market

Market Update: Consumer spending to slow while beef production increases

Alberta fed cattle prices were hovering in the range of $153 to $155 in mid-May as the market moved through a period of seasonal strong demand. U.S. cattle-on-feed inventories continue to run five to seven per cent above year-ago levels.

Larger market-ready supplies have caused the U.S. weekly slaughter pace during May to average about 25,000 head above May of 2017. Carcass weights are also up about 14 pounds from a year ago, resulting in a sharp year-over-year increase in second-quarter beef production.

Consumer spending during May moves through a seasonal high and then tends to decline from June through August. Moving into the summer, beef production is increasing while demand is decreasing, which will result in lower prices for fed cattle.

Feedlot margins have been hovering slightly above break-even during the first four months of the 2018. However, feedlot margins will move into red ink territory from June through September. At the same time, feedlot operators will be contending with stronger feed grain prices which will result in higher cost per pound gain. Therefore, the price environment for feeder cattle looks negative in the third quarter.

As of mid-May, medium- to larger-frame Charolais mixed steers averaging just under 850 pounds were quoted at $177 in central Alberta; tan mixed steers weighing 620 pounds were quoted at $225 in the same region.

Beef production increasing

The accompanying table shows the USDA is projecting second-quarter production to come in at 6.8 billion pounds, up from the 2017 production of 6.4 billion pounds. Third-quarter production is expected to experience a year-over-year increase of 200 million pounds. In Alberta and Saskatchewan, placements from September 2017 through December 2017 were 923,000 head, compared to previous year of 840,000 head — Western Canada is in a similar situation as the U.S.

U.S. quarterly beef production (2013 to 2017 is USDA actual data and 2018 are USDA estimates).

Conditions were ripe for the pent-up consumer demand to step forward during the weekends of Mothers Day, Memorial Day and many graduations. The holiday season has kicked into high gear, also enhancing consumption levels. May is a period of seasonally strong beef demand, similar to November and December. Producers need to be mindful that demand decreases from June through August.

Feedlot margins during the summer and early fall could be as low as $150 to $200 per head. Lower incomes in the feedlot sector will temper buying interest for yearlings. In the feed grain complex, Canadian barley stocks are expected to drop to historically low levels at the end of the 2017-18 crop year. Looking forward, Canadian barley and U.S. corn fundamentals are also quite tight for the 2018-19 crop year. We could see a significant rally in the feed grain complex during the summer.

Fed cattle prices are expected to trend lower during the summer and bottom during late August and early September. The fed cattle market will be contending with a sharp year-over-year increase in beef production and seasonally low demand. Feeding margins will be deep in red ink in the late summer because of low fed cattle prices and rising feed grain values. This will keep the yearling and calf markets under pressure. The beef and cattle complex will function to encourage demand through lower prices.

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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