The fed and feeder cattle markets continue to hold value despite the year-over-year increase in beef production. Alberta packers were buying fed cattle in the range of $175 to $177 in late April. Wholesale beef prices have been surprisingly strong as beef demand continues to exceed expectations. Major economic indicators are fairly encouraging which should bode well for consumer spending throughout the summer period.
Feedlot margins have been hovering near historic highs over the past month. Feeder cattle prices have also strengthened but not to the extent of the fed market. Larger-frame, lower-flesh mixed steers averaging 925 pounds were quoted at $172 landed in southern Alberta feedlots in late April. Feeder cattle prices are below the fed market, which doesn’t occur that often. In the short term, the fed cattle market will likely trade sideways and then soften in the third quarter. Feeder cattle prices are expected to stay firm throughout the summer and then come under pressure later in fall.
Cattle on feed in Alberta and Saskatchewan as of April 1 were 906,273 head, down four per cent from 941,140 head on April 1 of 2016. March placements were 185,763 head, up 15 per cent from March of 2016, while marketings were 135,750, up four per cent from 131,128 head last year.
Retail prices rationed demand
I strongly believe one of the main reasons for lower cattle and beef values last fall was due to relatively strong retail beef prices. The retail market was rationing demand while beef supplies were building, and building rather quickly. It was a supply crunch hangover, which usually causes the market to overextend to the downside.
This year, retail prices are encouraging demand with ground beef down six per cent from year-ago levels and down 15 per cent from April of 2015. Secondly, prices are lower for all staple foods, allowing consumers more freedom to choose higher-priced items such as beef, and which is now cheaper than a year ago. The wholesale retail spread has moved back in line to traditional levels.
The feeder cattle market has been percolating higher with favourable feeding margins. Remember, cattle feeding is a competitive business. In the long run, feedlots will bid up the price of feeder cattle until there is no margin.
Hedges not advised
Feedlot operators have been hesitant to bid up the feeder market because the cash price for fed cattle is sharply above the futures market. However, as time goes on, there are ideas that the futures market has been undervalued for both live and feeder contracts. In any case, the feeder market will likely hold value with feedlot margins running over $400 per head.
In central Alberta, Charolais-cross steers averaging 520 pounds reached up to a whopping $240; similar-quality heifers weighing from 500 to 530 pounds were actively moving from $200 to $203.
Given the strong cash market, no hedges are advised for fed or feeder cattle. Secondly, the Canadian feeder cattle market is trading at a premium to the U.S. values. This is making it difficult for Canadian producers to hedge or buy price insurance for their production. On April 21, CME composite price for 650 to 849 feeder steers, which is the official cash settlement price for the CME feeder cattle futures, was US$138.05 and the May feeder cattle futures closed at US$139.25.