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Cattle market endures volatility

Market Update: Beef oversupply will be an issue unless consumer spending picks up

Alberta fed cattle prices reached up to the range of $195 to $197 during the first week of May due to tight market-ready supplies and adverse weather in the U.S. southern Plains. The futures market has been trading at a sharp discount to the cash trade throughout winter and spring, causing feedlots to be aggressive on marketings on both sides of the border.

Carcass weights were declining and feedlots were moving a fair amount of green cattle in order to capture high fed cattle prices and historically large feeding margins. During the weekend of April 29, a severe snowstorm in Kansas and excessive moisture across much of the Midwest caused many feedlots to hold off on sales as off farm logistics became a nightmare in many counties. Packers scrambled to cover their nearby requirements with U.S. companies shopping aggressively for market-ready supplies across the Prairies and in Ontario.

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However, Canadian operators were in the same shape as our southern neighbours with feedlots moving cattle out of feedyards just over 1,150 pounds in some cases. As luck would have it, the Canadian dollar also dipped to 13-month lows, enhancing the overall price structure.

Wholesale prices surged and remain at relatively lofty levels as of late May. Feeder cattle prices in the 800-pound plus categories jumped nearly $40 within a two-week period. As of mid-May, the fed cattle market has fallen back to the $185 area while 850-pound steers have held value trading in the range of $205 to $210 in southern Alberta.

 

The U.S. numbers

The USDA continues to project a year-over-year production increase of 300 million for the second and third quarters of 2017. However, it is important to note that cattle-on-feed numbers were running very similar to year-ago levels on the April report. More importantly, weekly beef production is actually only coming in marginally higher than last year given the lower marketing weights.

We’re bound to see an increase in production but given recent data the current estimate may be somewhat overstated for the second quarter. By the third quarter, we should see marketing weights increase and the weekly slaughter run about 20,000 head above last year. I’m in agreement with the USDA on the third quarter.

In Canada, the weekly slaughter is running about 55,000 head per week, up from 49,000 head per week last year. Year-to-date beef production for the week ending May 6 was 347,534 mt, up about two per cent from last year but the number of cattle slaughtered is up six per cent. In Western Canada, steer dressed carcass weights are 829 pounds, down from 884 pounds last year.

Choice wholesale beef has rallied nearly US$40/cwt since early April reaching US$248 in mid-May. Select product has lagged which reflects larger supplies of green cattle coming on the market. Select wholesale prices were trading at US$225/cwt but these are both very good prices from a historical perspective. The problem is that retail beef prices have been grinding lower over the past year and we now see retail margins coming under pressure. It takes time for retailers to increase prices.

If we see a similar jump in retail prices as in the wholesale market, the retail market will function to ration demand and slow consumption, which is not what the market needs heading into the third quarter. We need to see the retail market remain relatively flat or increase slightly so that beef consumption doesn’t slowdown.

Feedlot margins have been historically strong, reaching over $300 per head for an extended period. However, it wasn’t until we saw the jump in fed cattle during the first week of May that feedlot operators bid up the price of replacements.

The inability for feedlots to lock in margins in the deferred positions kept a lid on feeder cattle prices earlier in spring. There was no way any operator would go out on a limb and bid aggressively for feeders if they couldn’t lock in a profit. We’ve now seen 600- to 650-pound steer calves trade in the range of $240 to as high as $255. I’m expecting the feeder market to remain relatively flat through the summer. The fall period is a bit uncertain.

In conclusion, cow-calf producers should use this recent rally in the futures market to take some price protection on their fall marketings. I’m worried the feeding margins will come under pressure in the third quarter and feedlots may lower bids on replacements. Given the year-over-year increase in the U.S. calf crop, the market will have some very large supplies to work through this fall as well.

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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