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Beef demand in 2018 pushes more production

Market Update: Fed-cattle prices need to rally for feeders to be profitable

During the second week of December, Alberta packers were buying fed cattle in the range of $150 to $152, up from $2 to $4 from a month earlier. Market-ready supplies in Alberta and Saskatchewan are running above year-ago levels which has limited the upside in the fed cattle market.

South of the border, U.S. fed-cattle prices have been percolating higher, reaching up to US$119 in mid-December. Healthy packing margins have caused the weekly slaughter pace to come in above expectations. Market-ready supplies in the U.S. are somewhat tighter than in Canada due to lower placements in the summer of 2019. Packers have been pulling cattle forward to satisfy nearby consumptive demand, which should keep feedlots current well into 2019.

Feeder cattle prices have been under pressure over the past month. Feedlot margins are hovering in negative territory and most operations have sufficient numbers at this time of year. In central Alberta, steers averaging 800 pounds have been selling in the range of $180 to $184, down approximately $8 from November’s average price. Barley prices continue to ratchet higher and the weaker Canadian dollar is making U.S. corn more expensive.

Placements up and down

Feeder cattle placements in Alberta and Saskatchewan from June through August were up approximately 20 per cent compared to the same period of 2017. Therefore, this has resulted in a year-over-year increase in market-ready supplies in Alberta and Saskatchewan during December and January. Therefore, the Alberta fed market is trading at a discount to the Nebraska market.

South of the border, feeder cattle placements in the lighter-weight categories during the June through August period were actually below year-ago levels. Market-ready supplies of fed cattle are rather snug keeping the U.S. market well supported. Packing margins have been quite favourable with estimates in the range of $150 to $200 per head during the fall so there is an incentive to keep the slaughter pace at the higher levels.

Stellar demand

This year will be remembered for the stellar beef demand due to the U.S. personal and corporate tax cuts. While the tax cuts occurred in March, the beef market only felt the changes in May when both grocery store spending and restaurant spending surged 10 per cent above year-ago levels.

While we don’t have official numbers for November and December, wholesale beef prices continue to exceed year-ago levels despite the year-over-year increase in beef production. Looking forward, producers need to be aware that consumers spend less on food in January and February. Everyone tries to lose five to 10 pounds after the holiday season while paying off credit card bills. This environment naturally results in softer beef demand.

Western Canadian feeder cattle prices have been under pressure since making seasonal highs in October. The year-over-year increase in feeder cattle placements during the summer months in resulted in lower demand for feeder cattle during November and December. At the same time, feedlot margins have been hovering in red ink and the industry hasn’t experienced significant equity buildup in the feedlot sector like last year. During November, pen space also become tight in southern Alberta, resulting in higher yardage costs. The August live cattle futures continue to trade at $11 discount to the April contract.

Market sooner than later

U.S. beef production is expected to experience a sharp year-over-year increase during the third quarter of 2019, which has cattle feeders on the defensive when purchasing replacements. Finally, barley and corn prices continue to percolate higher. Weakness in the Canadian dollar and stronger corn futures have contributed to the higher feed grain costs. Canadian barley fundamentals will be historically tight during the spring and summer of 2019. All these factors will continue to weight on the feeder market during the first quarter of 2019.

Looking forward, we need to see a $15 rally in fed-cattle prices so that feedlot margins move into positive territory in the first quarter of 2019. The prolonged period of negative margins will influence the feeder market more severely later in winter, especially with the weaker August live cattle futures. Last fall, I mentioned cow-calf producers should market their feeder cattle sooner rather than later. I believe this strategy is still applicable. This barley market has potential to rally $15/mt to $20/mt and colder temperatures could hinder off-farm logistics. GN

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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