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Canadian prices divorce from U.S. fundamentals

Market Update with Jerry Klassen: Alberta feeding margins are in the red by $200 per head for feedlots selling in the spot market

There was unusual price behaviour in western fed and feeder markets during the first weeks of February.

Earlier in January, Alberta fed cattle prices reached a high of $166 on live basis for March delivery. By mid-February, Alberta packers were only bidding $150 on a live basis for March 1-15 delivery. At the same time, U.S. fed cattle prices in the Southern Plains were rather firm, edging from US$123 on live basis in mid-January to US$125 in mid-February.

While U.S. feedlot margins are in positive territory hovering around US$50 per head, Alberta feeding margins were in red ink by $200 per head for feedlots selling fed cattle in the spot market. Negative margins in Alberta have set a negative tone for the feeder complex. Short keep replacements also dropped about $12 from the January highs but calves were only down $5 to $8 from last month.

In central Alberta, mixed steers with medium flesh levels and averaging 850 pounds were trading for $179 while mixed steers weighing 650 pounds were valued at $205 during the second week of February. The market is in a very precarious situation moving forward. U.S. fed cattle supplies are expected to tighten in April. Restaurant and retail demand tend to make a seasonal high in late March and early April. These two factors should result in higher prices for both fed and feeder cattle prices.

The U.S. slaughter came in above expectations during November and December which resulted in cattle moving to market sooner than anticipated. This situation has tightened U.S. market-ready supplies during the first quarter of 2019. Unofficial data has the January slaughter finishing about 20,000 head above year-ago levels. I’m expecting a similar year-over-year increase for February and March. The USDA WASDE report had U.S. first-quarter beef production at 6.490 billion pounds, which is only 25 million pounds above the first quarter of 2018.

The Canadian January slaughter came in at 216,458 head, up 17,976 head from January of 2018. Canadian exports of slaughter cattle during January were only down about 2,600 head from year-ago levels. If we take into account the placements by weight category on the cattle-on-feed reports, market-ready supplies in Alberta and Saskatchewan should be very similar to year-ago levels during February and March.

One would initially think that the Canadian market should be trading at a premium to U.S. values. However, Canadian packers have done a good job of trading in this market environment by booking larger supplies three to four weeks forward. We’ve also seen a few U.S. plants do this as well, but there is still sufficient open demand in the nearby positions to sustain the U.S. fed cattle market at the current levels. I’m expecting the Alberta fed cattle basis to remain relatively weak until mid-March.

January and February are months of seasonal low demand, but demand tends to surge in March. This usually results in stronger fed cattle prices. I’m expecting U.S. plants to aggressively source fed cattle from Western Canada at this time. Supplies will be at a seasonal low while demand will be at seasonal highs. The fed cattle basis is expected to strengthen in March. After April, fed cattle prices will trend lower. Supplies will increase and demand eases in May and June.

For feeder cattle, negative margins in the short term will weigh on prices. The U.S. third-quarter beef production (see table) is expected to come in 424 million pounds above year-ago levels. Alberta and Saskatchewan feedlot operators realize the detrimental price outlook for fed cattle from July through September, so feeder cattle will have to be purchased accordingly. The feeder complex could incorporate a risk discount due to the potential for burdensome supplies. Using a regular basis for fed cattle, one can make the argument that yearlings and calves are about $10 to $15 overpriced relative to the fed market for the summer months.

The fed cattle market will likely make a seasonal high in the March/April timeframe. This may enhance margins for the finishing feedlot in the short term. Feeding margins will likely move into negative territory late in the second quarter and we could see serious equity erosion in the third quarter. During August and September, we’ll see a surge in supplies along with seasonal low demand which will result in lower prices. Cow-calf operators should have protection in place for their fall marketings.

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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