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Volatile ride ahead for cattle complex

Market Update: Late October may be the best window to sell calves

The Alberta fed cattle market has been trending lower over the past two months as the market functions to encourage demand. In the previous issue, we explained that the beef market is characterized by an inelastic demand curve. Therefore, a small change in supplies can have a large influence on the price.

Monthly beef production increased from March through June. July production will be similar to the output in June; however, sharp year-over-year increases are expected during August through October. Alberta packers were buying fed cattle in the range of $145 to $147 during the last week of June, which is down nearly $17 from the late April high.

The market is expected to remain relatively flat during summer; prices will make a seasonal low in September and early October. Beef demand experiences a seasonal low in September and October. At the same time, beef production makes a seasonal high in October. Low demand and large supplies will make the early fall period a dreary time for the feedlot operator. The fundamentals are the opposite to the feeder complex. While feeder cattle supplies may be lower than expected, the upside in yearling prices will be tempered by strength in the feed grain complex. In any case, feeder cattle prices are expected to percolate higher during the fall period. At the time of writing this article, steers medium- to larger-frame mixed steers weighing 825 pounds were quoted at $188 in southern Alberta; similar-quality heifers were trading at $22 discount to steers in the same region.

Monthly beef production increased from March through June.
photo: File

The structure of the U.S. feeder cattle placements over the past four months is worth noting as it will have a large influence on Canadian fed and feeder cattle markets. From February through April, placements into U.S. feedlots realized a sharp year-over-year increase in the lighter weight categories. This will result in larger-than-expected beef production during the August through October period. August production will reach over 2.4 billion pounds. October monthly production will reach a yearly high near 2.6 billion pounds. The market has serious work to do to absorb these larger supplies.

Demand will ramp up for holidays

Beef production is expected to taper off during November and December. I’m expecting the cattle market to put in a seasonal low during September and first half of October. Once packers start buying for the November holidays, fed cattle prices will start to percolate higher and feeding margins will improve.

Beef demand drops by nearly 10 per cent from August to September. During September and October, restaurant spending is at a seasonal low while retail food spending is also slower. The softer demand will contribute to the lower prices.

The feeder cattle market is the fed cattle market five months forward. At this time, I’m expecting 2020 first-quarter beef production to come in near 6.3 billion pounds, down from the 2019 first-quarter beef production of 6.4 billion pounds. This is no secret; therefore, feedlots will be very aggressive for calves and yearlings that will be marketed as fed cattle during March of 2020. Similar to 2019, fed cattle prices will probably make a seasonal high in late winter or early spring of 2020.

Western Canadian yearling supplies this fall are expected to be down two to four per cent from year-ago levels. The 2018 Canadian calf crop was marginally lower than in 2017. Secondly, the drier conditions in Saskatchewan and parts of Manitoba caused ranchers and cow-calf producers to market calves sooner than normal. Hay and forage supplies are very tight in the eastern Prairie region.

In the short term, the fed and feeder markets will remain under pressure because fed cattle prices will make seasonal lows in the early fall. During September and October, the feeder cattle prices will divorce from the fed cattle market because there will be a year-over-year decline during the first quarter of 2020. Cow-calf producers will want to sell their calves in late October or early November because this is when the feeder market will likely make a seasonal high.

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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