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Cattle market fundamentals in a transition stage

Market Update with Jerry Klassen: The market is telling producers to sell yearlings now

Alberta fed cattle prices hovered in the range of $145 to $148 throughout July. Steady domestic and export demand sustained the market at the current levels despite the burdensome supply.

In the previous issue, our market outlook for fed cattle was for stable prices during the summer. We also mentioned that the market would make a seasonal low in September and October. We haven’t changed the price outlook and recent data reinforces our price expectations.

The outlook for feeder cattle prices was for higher prices during the fall. Yearling prices have exceeded our expectations while calf values are marginally higher. As of early August, larger-frame, lower-flesh steers weighing 900 pounds sold for $184 in central Alberta, which is up about $15 from late June. The cattle fundamentals are moving through a transition stage. The weekly slaughter pace will increase during the fall while beef demand declines during September and October. At the same time, feeder cattle prices will divorce from the fed cattle market due to the tighter supply forecast for the first quarter of 2020.

U.S. feedlot placements increased year-over-year from February through April. It’s important to note that placements in the mid-weight categories were significantly higher than a year ago. These higher placements have caused cattle-on-feed inventories to run slightly above year-ago levels. Therefore, the U.S. slaughter during August and September is expected to average between 660,000 and 670,000 head per week. However, during October the weekly slaughter will reach up to 700,000 head per week. We’ve mentioned in previous issues that beef demand is relatively inelastic so a small change in supply can have a large change in the price.

Higher supplies in Western Canada

Market-ready supplies in Western Canada are expected to be quite burdensome during September which will cause the fed cattle basis to come under pressure. We’ll likely see market-ready supplies decline in October. However, given the large numbers south of the border, we may not see much improvement in the western Canadian fed cattle basis.

U.S. restaurant spending has been running six to seven per cent above a year ago. Consumer wages are up about three per cent from last year while inflation has been hovering around 1.8 per cent. Unemployment continues to come in near historical lows while consumer confidence is near historic highs. We can say in this environment that beef demand is saturated and we have to look at seasonal swings to forecast the influence on the fed cattle market.

Restaurants and other eating places (millions of dollars).
photo: File

The bar graph shows U.S. consumer spending at “restaurants and other eating-out places.” It’s important to note that restaurant spending drops nearly 10 per cent on a month-over-month basis from August through September. There is usually a minor increase in spending in October but it depends on how the economy is faring at this time. In October, the fed cattle market will be contending with the largest weekly beef production of the year while beef demand moves through seasonal lows. This will result in lower fed cattle prices. Fed cattle prices will only start to improve in November and continue to percolate higher during December.

The feeder market and specifically prices for yearlings give us a good idea of the fed cattle market five months forward. In the U.S. beef production forecast (see table) for 2019, the first-quarter production for 2020 is expected to be similar to that of 2019. The USDA cattle inventory report forecasted the 2019 calf crop to come in at 36.3 million, down 100,000 head from 2018. Year-to-date U.S. feedlot placements are running slightly ahead of last year so we’re expecting a marginal year-over-year decline in available U.S. feeder cattle supplies this fall. This is contributing the stronger yearling prices.

The Canadian basis for 800-pound-plus yearlings is extremely strong. The market is telling producers to sell yearlings now. You will not be rewarded for holding yearlings longer or feeding to heavier weights. The calf market is in a totally different environment as the basis is extremely weak from a historic perspective. Calves coming on the market now will hit the fed market in the second quarter of 2020 when beef production will increase year-over-year. Look for the basis on calves to increase once yearling supplies dry up. This will likely be the year that ranchers are rewarded for feeding calves through the winter.

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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