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Second-quarter beef production to affect market

Market Update with Jerry Klassen: Tighter U.S. supplies will continue until April, then the tide will turn

Alberta fed cattle prices were trading in the range of $136 to $139 during the war half of September, while in mid- to late October Alberta packers were buying fed cattle in the range of $143 to $145. Although fed cattle prices have ratcheted higher, yearling and calf markets are relatively unchanged.

In central Alberta, larger-frame, lower-flesh mixed steers weighing 880 to 925 pounds were quoted in the range of $190 to $194, while semi-weaned vaccinated steer calves averaging 600 pounds were quoted in the $214 to $218 range.

I haven’t changed my price outlook for the winter and spring. Canadian and U.S. beef supplies are expected to be rather tight in the first quarter of 2020 but market-ready supplies of fed cattle are expected to be extremely burdensome in the second quarter of 2020. Therefore, fed cattle prices are projected to percolate higher over the winter and make a seasonal high in March. Yearling prices are expected to hold value and trade sideways through November but then trend lower from December onward. Calf prices will have limited upside given the sharp year-over-year increase in second- and third-quarter beef production. Calf prices are expected to also trend lower longer-term.

The U.S. numbers

U.S. feedlot placements have had a counter-seasonal pattern compared to the past couple of years. This may be due to the adverse weather or just the fact that U.S. cow-calf producers have held onto feeder cattle longer due to lower prices during the late summer and early fall. In any case, for the three months from June through August 2019, U.S. feedlot placements under 800 pounds have come in 262,000 head below year-ago levels for the same three-months. In the October USDA WASDE report, U.S. beef production for the fourth quarter of 2019 was estimated at 6.800 billion pounds, down from 6.855 billion during the fourth quarter of 2018.

The USDA also lowered 2020 first-quarter beef production but increased second-quarter output. These adjustments confirm our price expectations from October. The USDA is now projecting first-quarter production to finish at 6.525 billion pounds, up 111 million from the first quarter of 2019. I wouldn’t be surprised to see further downward revisions to first-quarter production. The 2020 second-quarter production (see table below) is now projected to reach 7.150 billion pounds, up 336 million from the second quarter of 2019.

U.S. quarterly beef production. *Estimates for fourth quarter of 2019 and all of 2020 are from USDA.

Strength in the fed cattle market will support the feeder complex throughout November and possibly in early December. Feedlot margins have been hovering in red ink but have potential to move into profitable territory in the latter half of November. The February and April live cattle futures are expected to trend higher from now until February, which will sustain the feeder market. Ranchers and backgrounding operators need to remember the feeder cattle futures are the live cattle five months forward. The fed cattle price outlook is very negative for the second and third quarters of 2020. We may see the feeder cattle futures rally through November. However, the cash feeder market has potential to incorporate a risk discount over the winter.

Plenty of feed grains this fall

During the 2018-19 crop year, western Canadian feed grain prices were very strong due to tight barley supplies. The economics for feeding cattle were more favourable in the U.S., which encouraged feeder cattle exports. For the 2019-20 crop year, feed grain supplies in Western Canada are extremely onerous due to the year-over-year increase in barley production and larger supplies of feed wheat. This will temper feeder cattle exports to the U.S. These economics may distort the price insurance premiums which is based on options on the feeder cattle futures.

The function of the feeder market in 2020 is to discourage production through lower prices. In the short term, feeder cattle prices will be supported by the stronger fed cattle market. However, this will be an opportunity for cow-calf producers and backgrounders to buy price insurance or take some type of price protection. The premiums for price insurance may be overvalued because feed grain prices are lower in Western Canada relative to the main feeding regions in the U.S. If we see a rally in the corn market due to lower-than-expected production, feeder cattle futures will come under pressure while the western Canadian cash feeder market will hold value.

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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