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Calf market will feel the pinch come fall

Market Update: It will take time to work burdensome beef supplies through the U.S. system

Alberta fed cattle prices have traded in the range of $162 to $166 throughout February and March, but the market is poised to grind lower during the second quarter due to the large year-over-year increase in second-quarter beef production.

Fed cattle are poised for a $15 to $20 drop over the next couple of months as the market functions to encourage demand. Feeder cattle prices have been grinding lower since the beginning of the year. Yearling steers weighing 900 pounds were trading in the range of $190 to $195 in the late December, but during the last week of March, similar-weight cattle were only averaging $155 to $158 in Western Canada. We’ve seen a $40 drop in the heavier-weight categories.

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Lighter-weight feeders and cattle fit for grass held up fairly well for the first couple of months of 2018 but have dropped about $20 throughout March. Calves weighing around 550 pounds were as high as $240 in late February, but have since traded in the range of $220 to $225. More recently, retaliatory tariffs from China have included a 25 per cent tariff on U.S. pork, which has psychologically spilled over into the beef complex. Uncertainty regarding NAFTA along with other potential trade barriers has also set a defensive tone for feedlot operators shopping for replacement cattle.

More beef coming on board

Cattle-on-feed inventories as of March 1 were 11.7 million head, up nine per cent from last year and February year-over-year placements increased seven per cent. Given the larger cattle-on-feed inventories, second-quarter beef production is projected to be up 800 million pounds from year-ago levels. Larger beef supplies in the second quarter will result in lower fed cattle prices.

Seasonally, beef demand peaks in mid March and then starts to decline in the summer. During 2018, the northeastern U.S. experienced four major snowstorms within three weeks affecting 20 to 25 per cent of the U.S. population. Beef demand was not as strong as anticipated due to slower restaurant and retail traffic. However, wholesale beef prices held up fairly well. Looking forward, the U.S. domestic market needs to absorb an additional 700 million pounds in the second quarter. The market has some work to do.

Since January, the feeder market has been anticipating this surge in second-quarter beef production. It appears that the live and feeder cattle futures made seasonal highs in February but have since dropped sharply. Remember, it’s a futures market. Traders are always anticipating conditions three to five months forward. This is why cattle producers need to have a good idea of the fundamentals to plan their marketing strategy accordingly.

Feedlot margins have been quite favourable so far in 2018, but this will change in the second quarter. Those high-priced yearlings and calves from last fall are not looking very profitable. Feedlot margins from May through August could be in red ink by $200 to $300 per head. This is not going to sit well for yearling and feeder cattle prices in August and September. Calf markets this past winter held value until March. I’m still expecting yearling supplies this fall to be below year-ago levels but feedlot buying power will be limited because of the negative margins through the late spring and summer.

Rising feed grain prices have also wreaked havoc on the feeder market. Barley prices have risen about $40/mt since last fall and we could see further upside in the summer. A year-over-year decline in U.S. corn acres will make the feed grain complex extremely sensitive to growing conditions. The corn and barley markets have a high probability of incorporating a risk premium of $20/mt to $40/mt due to the uncertainty in production.

NAFTA and U.S. trade uncertainty has feedlot operators on the defensive. President Trump’s tax cuts were favourable for beef demand because personal income increased, but trade barriers or tariffs will lower U.S. consumer confidence and raise unemployment. The costs of trade tariffs multiply (sometimes exponentially) throughout the economy and offset any gains from tax cuts.

Very simply, tax cuts are irrelevant if one doesn’t have a job. Milton Freidman stated “Tariff benefits are visible because a small number of workers are protected; however, tariff harm is invisible because people have lower income, but they don’t know it. In time of war, we blockade our enemies in order to prevent them from getting the goods from us. In time of peace, we do to ourselves by tariffs what our enemy does to us in time of war.”

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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