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Cattle market in a transition stage

Market Update with Jerry Klassen: It may take a coronavirus vaccine before beef demand improves

During the last half of October, Alberta packers were buying fed cattle on a live basis in the range of $134 to $136 f.o.b. the feedlot, which is relatively unchanged from the average price levels in September.

At the same time, fed cattle in the U.S. Southern Plains were selling at US$108, up about US$6 from 30 days earlier. Feedlots in Alberta and Saskatchewan are backed up with market-ready supplies due to lower slaughter pace back in spring. However, the backlog has basically been alleviated in the U.S. although market-ready supplies are still above year-ago levels.

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Demand has taken a step backwards over the past month. Rising COVID cases in Canada and the U.S. have slowed restaurant traffic as many states have reversed opening procedures. The market remains vulnerable at a time when the beef complex is functioning to encourage demand due to the sharp year-over-year increase in quarterly beef production.

The feeder market continues to digest the rise in the feed grain complex. Barley prices in southern Alberta have rallied about $50/mt off the harvest low. Barley exports are running sharply above year-ago levels due to stronger Chinese demand. At the time of writing this article, larger-frame, lower-flesh steers just off grass weighing 850 pounds were trading in the range of $185 to $188 while heifers were selling at a $12 to $16 discount. Calf prices have been quite variable across the Prairies, which makes the market hard to define.

Dealing with the backlog

The western Canadian fed cattle market has been trading at a sharp discount to prices south of the border. As of Oct.17 there were an estimated 55,000 fed cattle on the set-aside program in Alberta and Saskatchewan. Alberta releases the numbers weekly but the Saskatchewan data is estimated from trade sources. In the U.S. the backlog isn’t as severe and will likely be cleaned up by mid-November.

The U.S. fed market is expected to percolate higher in the final two months of 2020, which will provide underlying support for the Canadian prices. We should see an increase in fed cattle exports over the next few months. However, we’ll probably see about 100,000 head of fed cattle placed on the set-aside program before it’s finished. On Oct. 1, cattle-on-feed inventories in Alberta and Saskatchewan were up nine per cent over year-ago levels and up 17 per cent from the five-year average. The backlog of market-ready supplies in Western Canada is also weighing on the calf market in the short term.

U.S. quarterly beef production estimates are relatively unchanged from last month. Beef demand is inelastic in a normal environment so a small change in supply can have a large influence on the price. There will be a very volatile fed cattle market over the next year. The USDA data suggests that we’ll see a year-over-year decrease in first quarter production followed by a sharp increase in the second quarter. The beef production estimates in the latter half of 2021 (see table below) will start to see the effects of the two consecutive lower calf crops in the U.S.

Beef production during the third and fourth quarters of 2021 has potential to be down a combined 570 million pounds compared to the same timeframe of 2020. This will result in very strong fed cattle prices in the final quarter of 2021.

Demand struggling

As of mid-October, California, Colorado, Texas, Illinois and New York were reversing COVID opening procedures. The population in these states totals about 100 million so it is a sizeable portion of the country. Canada was also implementing tighter restrictions in the major eastern centres. Wholesale beef prices are down from a year ago. U.S. retail prices have also dropped below last year after being very strong earlier in summer. Restaurant traffic is still down about 50 per cent from a year ago. Beef demand will struggle in the short term. There will likely be some vaccine breakthroughs over the next six months which should cause beef demand to resume some type of normalcy.

Yearling prices have held value over the past month because stronger fed cattle values are expected in the first quarter of 2021. However, calves weighing 500 to 700 pounds have been under pressure because these cattle will be ready during the second quarter when beef supplies will be rather burdensome. I’m projecting a historically tight barley carryout for the 2020/21 crop year so there is no signal this rally is over. I mentioned in my October column that calf prices will likely make seasonal lows in October. It now looks like these lower values will be extended into November. Calves under 500 pounds have been very strong because these cattle will come on the fed market next fall.

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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