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Beef demand heads into the slow months

Market Update with Jerry Klassen: Be prepared, as the high yearling market only has one way to go

Alberta packers were buying fed cattle in the range of $140 to $143 during the first half of September. The market has come under pressure due to the year over year increase in market-ready feed supplies.

In addition to the higher beef production, beef demand is moving through a seasonal low. During September and October restaurant traffic slows down and retail beef consumption also eases. Feeding margins have been in negative territory over the past four months. As of early September, feedlot pen closeouts are in negative territory by $150 to $200 per head. It looks like we could see another couple or months of negative margins so this will weigh on the feeder market longer term.

Yearling prices have been red hot as of late with 850-pound steers trading at 52-week highs. According to Statistics Canada, the number of yearlings in Western Canada on cow-calf and backgrounding operations as of July 1 was down nearly 14 per cent from July 1 of 2018. Another factor contributing to the strong yearling market is the fact that feed barley prices have dropped nearly $80/mt from early July. Calf values have been relatively flat throughout August and the first half of September. Western Canadian calf numbers are about the same as last year. The fed and feeder markets have potential to be quite volatile over the next couple of months.

photo: File

We may see further downside in the fed market before prices turn higher. U.S. fed cattle supplies during September and October are expected to be extremely burdensome, which will spill over into the western Canadian market. U.S. beef production will be at seasonal highs during September and October while beef demand moves through a seasonal low. This environment could cause the fed market to drop $10 from current levels. The lowest fed cattle prices of the year in Alberta are expected during the first half of October which could be as low as $125.

Holiday demand is coming

During November, the weekly slaughter pace will start to decline while demand tends to improve. Packers and retailers start gearing up for the holiday season which starts with the U.S. Thanksgiving. The market tends to percolate slowly higher between December and March. Once we move into the new calendar year, beef supplies start to tighten. I’m expecting the Alberta fed cattle market to average $155 in January and February and $162 in March.

It’s important that cow-calf producers have an idea of the price expectations for fed cattle because this will determine the price structure for replacements. We have a unique market situation for the feeder market. The number of yearlings (heifers and steers) on western Canadian cow-calf operations and backgrounding operations as of July 1 was 789,800 head, down 13.9 per cent from 916,800 head on July 1 of 2018. In Western Canada, yearling numbers are below year-ago levels while in the U.S., yearling supplies are actually up one per cent from 2018.

The futures market is trading near contract lows but Canadian yearling prices are near annual highs. The Canadian yearling market has divorced from U.S. prices and this will make it very difficult for feedlot operators to be profitable over the winter and spring.

Three main factors that will weigh on calf prices this fall. Currently, Alberta feedlot margins are deep in negative territory by $150 to $200 per head. It doesn’t look like the margin structure will turn around over the next couple of months. Secondly, the number of calves on finishing operations in Western Canada as of July 1 was up 7.6 per cent from July 1 of 2018. The drier conditions caused more calves to move into feedlots earlier. This will lower demand later on in fall. Finally, the fed cattle outlook for the summer of 2020 does not look favourable. We could see Alberta fed cattle prices dip to the $110 area, about $10 below the lows of 2019. The calf market needs to discourage production, which means the cow slaughter needs to increase.

Cow-calf operators should be aggressive with the yearling and calf marketings. Yearling prices only have one way to go with values at 52-week highs. Calf prices are expected to trend lower so that the U.S. cow-calf operator starts to liquidate the herd.

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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