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Beef complex moving toward higher supplies

Market Update with Jerry Klassen: Already-tight feeder margins expected to be negative by early fall

During the last week of April, Alberta packers were buying fed cattle in the range of $160 to $163 on a live basis. The market has been contending with tighter supplies of market-ready cattle south of the border. At the same time, wholesale beef prices have been percolating higher as retail and restaurant demand moves through a period of seasonal strength.

The market will move through a transition phase over the next couple of months. U.S. third-quarter beef production is projected to come in sharply above a year ago. August and September are two months of seasonally low demand. This market environment will likely cause the fed cattle market to trend lower from June through September.

Despite the lower numbers on finishing operations, the Canadian slaughter is running approximately 80,000 head above a year ago. Canadian exports of slaughter steers, heifers and cows are up above 40,000 over last year. Logically, the domestic slaughter and exports cannot continue this pace.

Different in the U.S.

The U.S. situation is the exact opposite. U.S. feeder cattle placements from September through January were below year-ago levels, resulting in tighter supplies of market-ready cattle during the second quarter of 2019. Remember that the U.S. Southern Plains went through a severe drought during the winter of 2017-18. This year, conditions have been optimal and feedlot placements have been above March and April last year. This will result in a sharp year-over-year increase in beef production during the third and fourth quarters of 2019.

The live cattle futures market was quite volatile throughout April because the managed money was holding a record long position. At the same time, the commercial trader was holding a record short position. Commercial traders are hedgers so if the packers have a record short position in the futures, this means they have a record long position in the cash market. Packers will draw on contracted supplies during the first half of May which will cause the U.S. fed cattle market to weaken.

The feeder market is also in a precarious situation. Western Canadian feeding margins have been hovering just below breakeven throughout the winter and spring. It appears margins will drop deeper in red ink throughout the summer and fall. The cost-per-pound gains will be significantly lower in the fall of 2019. Despite the lower input costs, margins will remain in negative territory. Fed cattle prices during the fall are expected to drop to the range of $135 to $145 which is about $20 below current levels.

I continue to recommend cow-calf producers and backgrounding operators have price insurance on 100 per cent of their fall marketings. Earlier in April, adverse weather across the Midwest caused the fed and feeder cattle futures to incorporate a risk premium. It’s been estimated that a large number of calves (maybe one million) died in the flooding but the actual number will only be known later in summer on the cattle inventory report. This was a clear “buy the rumour, sell the fact” idea.

There were also media reports that China was going to import a large amount of U.S. pork which would drive up North American red meat prices. It’s important to remember there are still retaliatory tariffs of 62 per cent on U.S. pork entering China. Secondly, the USDA WASDE report showed only a marginal increase in pork exports for 2019. Live and feeder cattle futures received spillover technical buying from the hog complex but this was also a “buy the rumour, sell the fact” situation. It’s important cattle producers keep media hype in perspective.

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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