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Cattle Price Outlook Remains Bright

Fed cattle in Alberta traded in the range of $107 to $111/cwt in the first half of October, up from the September highs of $104. At the same time, fed cattle in Texas sold for $119 while cattle in Nebraska moved at $119/cwt on a live basis and $189/cwt on a dressed basis. Market ready supplies are rather tight and U.S. beef production is expected to slowly drop under year ago in the final quarter of 2012. Packing margins are currently in negative territory as wholesale prices fail to make new highs. Choice product was quoted at $186/cwt in mid October, which is basically the same as a month earlier. However, select product dropped to $168/cwt which is down $7/cwt from average values in September. Looking into the winter and spring of 2012, U.S. and Canadian beef production is expected to decline while the U.S. economy recovers from recessionary type conditions this past summer.

The lighter-weight feedlot placements earlier in summer will likely result in lower marketing weights over the winter. Feeding operations appear to be very current with production and market ready supplies remain tight. Lower beef production estimates in the final quarter of 2011 and first quarter of 2012 continue to support the nearby price structure. The deferred live cattle futures, such as the April contract, have incorporated a risk premium due to the uncertainty in production. Notice that U.S. beef production for 2012 is expected to be down nearly 1.3 billion pounds in comparison to 2011.

The Canadian industry continues to grind through seasonal and historically low market-ready supplies. The Canadian slaughter has improved in October but remains well behind last year. The year-todate slaughter to October 1 was 2.180 million head, down 11.4 per cent from October 1 of 2010. Canadian steer and heifer exports to the U.S. for slaughter from January 1 through September 24 were 298,043 head, down a whopping 37.6 per cent in comparison to 2010.

Overall U.S. and Canadian meat demand remains strong and is expected to improve. Pork prices are also near historical highs as the hog complex moves into an expansion phase. Hog plants in the U.S. are struggling to secure nearby supplies as the weekly hog slaughter is running near record highs. U.S. consumer spending is starting to improve which should bode well for restaurant traffic over the winter. U.S. year-todate at-home food spending in has been running 12.2 per cent over 2010; away-from-home food spending is up 4.6 per cent over last year. U.S. ground beef prices are up 18 per cent from October of 2010 while higher end cuts such as sirloin steaks are up only five per cent.

SUMMARY

In conclusion, the fed cattle market is anticipating lower production in Canada and the U.S. in the final quarter of 2011 and first quarter of 2012. However, the market is rationing demand in the short term as the rise in retail beef prices has outpaced the rise in consumer spending. If wholesale prices don t improve, it will be difficult for packers to pay higher prices for fed cattle. Over the winter, consumer confidence should improve as the U.S. economy expands. Retail spending is showing signs of growth, which is underpinning beef demand. Given the positive outlook for U.S. and Canadian economies, I wouldn t be surprised to see Canadian fed cattle prices strengthen $8/cwt to $10/cwt from current levels, between now and April.

Feeder cattle prices continue to percolate higher due to positive feedlot margins and higher fed cattle prices. U.S. feedlot placements are expected to drop under year-ago levels in December through the first quarter of 2012. Recent rains have provided temporary relief to the drought conditions in the U.S. southern plains but pasture ratings remain very low for this time of year. Winter wheat conditions in Texas, Oklahoma and Kansas will have a large effect on feedlot placements over the next two months.

Western Canadian cow-calf producers have plenty of forage supplies, which has slowed the marketing pace. Alberta and Saskatchewan feedlots have lower feed costs relative to Eastern Canada and the U.S., therefore, we have seen feeder cattle in Alberta and Saskatchewan trade at a premium. Feeder cattle exports continue to run a minimal levels due to the stronger domestic demand. Barley prices have strengthened $20/mt from the harvest lows and I wouldn t be surprised to see further upside over the winter.

Southern Alberta Pfizer Gold age-verified angus cross steers averaging 528 pounds reached $161/cwt in early October. The market may add an additional $8/cwt to $10/ cwt over the next four months but I m don t believe additional upside can be justified given the outlook for fed cattle and barley.

GeraldKlassenanalyzescattleandhogmarketsinWinnipegandalsomaintainsaninterestinthefamilyfeedlotinSouthernAlberta.Forcommentsorspeakingengagements,hecanbereachedat [email protected] or2042878268

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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