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Cattle market is a tough one to call

Risk of increased 2016 production could throw a wrench into prices

This past spring, we saw the stars align with all major factors favouring higher beef and cattle prices. Moving into fall of 2015, the cattle market continues the transition phase with growing meat supplies along with softer consumer demand.

Alberta packers were buying fed cattle at $182 in mid-August, which was down from the spring highs of $204. Breakeven pen closeouts are in the range of $187 to $190 so feedlots are contending with a slightly negative margin structure.

Feed grain prices have also come off the spring highs with barley and feed wheat trading around $220/mt delivered Southern Alberta; however the weaker input costs have not offset the decrease in fed cattle prices. Smaller volumes of varying quality have characterized the feeder cattle market across Western Canada. There are a few batches of fresh yearlings and calves coming on the market and prices are under pressure given the current environment.

In my July column, I mentioned the beef contraction phase was over and producers should expect quarterly beef production to exceed year-ago levels starting in the third quarter.

U.S. feedlot inventories are running slightly above year-ago levels although we have seen feeder cattle placements drop over the past few months. Therefore, it now looks like third- and fourth-quarter beef production for 2015 will be just marginally higher than last year.

In September and October, feedlot placements are expected to exceed year-ago levels which will cause beef production to experience a sharp year-over-year increase in the first and second quarters of 2016.

The accompanying table shows second-quarter beef production in 2016 is expected to be 650 million pounds higher compared to the second quarter of 2015. This is a major fundamental shift which will weigh on the deferred live cattle futures and limit the ability of feedlot operators to lock in a profit on fall placed calves. And 2016 beef production is expected to be up nearly 1.1 billion pounds over 2015.

US-quarterly-beef-production

Canadian numbers

Alberta and Saskatchewan on-feed numbers have been running about eight per cent below last year during the summer months. Canadian year-to-date beef production for the week ending August 1 was 545,723 mt, down six per cent from the same period of 2014. Despite the weaker Canadian dollar, exports of slaughter steers and heifers to the U.S. are down 48 per cent for 2015 compared to last year while exports of fresh and chilled beef cuts are relatively the same as in 2014. The Canadian cattle and beef market is becoming more dependent on domestic demand to set the price structure. Higher U.S. pork and poultry production along with growing meat stocks is tempering exports of cattle and beef products. U.S. packer bids have been about $6 to $8 below Alberta bids throughout the summer limiting exports and this will likely continue into the fall.

Low energy prices initially increases disposable income for the average consumer, that is until crude oil prices drop so low that companies start laying off hundreds of people. Now we start seeing the effect on overall beef demand because these people are not eating at restaurants as often.

Feeder values

Feeder cattle may hold value into the fall despite the current —slightly negative — feeding margin. Feedlot operators may be more aggressive on heavier feeder cattle in September that will be market ready in late December or early January. Feed grain prices will also grind lower during the harvest period, which is supportive. There is a fair amount of optimism given the margins over the past year and with plenty of pen space available, feedlots will buy a certain amount of cattle on the hope factor.

Producers that placed cattle in a custom feedlot will also be back in full force so overall demand for feeders is quite strong. Canadian feeder cattle supplies remain near historical lows and if the export pace improves, available supplies could be lower than anticipated.

In past years, waiting for lower prices has not been profitable so the mindset is to fill up earlier. I want to emphasize the potential for higher beef production in the second quarter of 2016, which could have a serious negative effect on the margins for high-priced calves bought in the 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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