In early August, Alberta packers were buying fed cattle in the range of $244 to $247 on a dressed basis while live-basis prices were quoted in the range of $145 to $146. The market has traded in a sideways range throughout the summer and it appears that the seasonal lows may be in place.
Beef demand is coming in higher than anticipated with the U.S. and Canadian economies running on all cylinders. Consumer spending and beef consumption has been higher than anticipated and the market has done a good job absorbing the year-over-year increase in beef production.
The fed cattle market is in a transition stage. Beef demand tends to make a seasonal low in late August. During the latter half of September, demand tends to increase and remain strong into the fall. The U.S. weekly slaughter has been running sharply above year-ago levels but this will change later in September and October.
Optimism for the fourth-quarter live cattle prices has spilled over into the feeder market. Steers averaging 900 pounds have been trading near the psychological level of $200. The April live cattle futures are trading near contract highs, causing feedlots to be more aggressive for 850-pound-plus feeders. Feedlot margins have been hovering in negative territory throughout the summer but this will change in September. Profitability is expected to return over the next month, which will enhance demand for feeder cattle.
U.S. cattle-on-feed inventories have been running four to six per cent above year-ago levels throughout the summer. Feeder cattle placements over the past two months have been similar to last year, however this data can be somewhat misleading when you look at placements by weight category. If you look at the placements in mid-weight ranges from April through June, one can see that the monthly slaughter for August through October should actually finish below year-ago levels.
Alberta and Saskatchewan cattle-on-feed inventories as of July 1 were six per cent compared to July 1 of 2017. Placements during June were up a whopping 55 per cent from year-ago levels. This can also be misleading because the placement pattern in prior months also looks like they’ll be tighter supplies for September and October. For November and December, preliminary data and projections suggest that market-ready supplies will be similar to last year.
Beef demand has been stronger than expected throughout the summer and will likely continue to exceed expectations during the fall. Think of it this way: August is a period when demand is at seasonal lows so it only improves moving forward. U.S. second-quarter GDP came in at 4.1 per cent and third-quarter GDP is projected to finish in the range of four to five per cent. Approximately 70 per cent of GDP is composed of consumer spending. For beef demand, a one per cent rise in consumer spending equates to a one per cent increase in beef demand. We’re seeing beef demand increase by approximately the same percentage of beef production.
One can’t underestimate the ability of tax cuts to stimulate the economy. In December 2017, President Trump signed $1.5 trillion worth of tax cuts and he also signed off on a $300 billion spending increase earlier in winter of this year. This has been extremely beneficial for the lower fifth of the income bracket in the U.S. One caveat longer term — watch the Trump administration’s protectionist policies.
The feeder market has been surprisingly strong throughout the summer. Feedlot margins are expected to move into positive territory in late September and October. Notice that April live cattle futures have been trading near contract highs. The favourable feedlot margins and positive fed cattle outlook for the winter and spring period will bode well for the feeder cattle market.
The Canadian barley crop is estimated at 9.1 million mt, compared to the 2017 production of 7.9 million mt. There will be harvest pressure during August and September given the year-over-year increase in production. However, I’m actually bullish on the barley and corn markets longer term.
World corn stocks are projected to drop to 152 million mt at the end of the 2018/19 crop year, which is down from the 10-year average of 164 million mt. The world is now in a situation where a crop problem in South America would result in corn prices moving to historical highs. We’re going to see a sharp year-over-year increase in Canadian barley exports, mainly from China. This is going to temper the upside in the feeder cattle market in the late fall and winter period. Producers with yearlings should be very aggressive on sales in September.
For cow-calf producers, don’t plan on backgrounding cattle this year. Sell the calves in October or November. This feed grain complex has potential to get explosive next spring and feedlots will shy away from feeder cattle like the plague.