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Contracting supplies improve cattle outlook

Aside from seasonal ups and downs, the trend is upward

During the last week of July, Alberta packers were buying fed cattle on a live basis in the range of $134 to $135 f.o.b the feedlot. The weekly slaughter pace on both sides of the border has been running similar to year-ago levels over the past few weeks.

The backlog of market-ready supplies is slowly shrinking as we move into the fall. Beef exports have been coming in higher than expected, draining the surplus production away from the domestic market. Despite the rising COVID cases in the U.S., domestic North American beef demand has also improved, causing wholesale prices to stabilize. The feeder market remains firm heading into the main fall run.

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The USDA forecasted a year-over-year decline in the 2020 calf crop in the July semi-annual cattle inventory report. This will be the second year of herd contraction south of the border. As of early August, mixed steers averaging 850 pounds coming off pasture were quoted in the range of $185 to $190. Prices for yearlings are near 52-week highs. Feed grain prices are expected to soften through the harvest period and feedlots will be contending with lower cost-per-pound gain. The cattle markets have shrugged off economic uncertainty for the time being. Despite rising COVID cases in the U.S., unemployment levels are expected to decrease over the next six months, which should enhance consumer spending.

At the end of July, U.S. feedlots were holding approximately one million head of cattle that should have been slaughtered earlier in spring and summer. Most of this backlog will be alleviated over the next three months.

Cattle on feed in U.S. feedlots as of July 1 were 11.438 million head, down 42,000 head from the July 1 of 2019. We’ve seen a counter-seasonal trend in placements throughout the spring period as U.S. cow-calf producers held back on sales. Feeder cattle outside feedlots as of July 1 are expected to be up about 400,000 head over July 1 of 2019.

Feedlot placements during June were 1.798 million head, up two per cent or 37,000 head from June of 2019; fed cattle marketings were 1.969 million head, up one per cent from June of 2019. I’m expecting to see a year-over-year increase in feedlot placements throughout the fall period.

Market dealing with backlog

In Canada, finishing feedlots were also holding larger supplies of market-ready cattle due to the lower slaughter pace in April and May. Trade estimates suggest market-ready supplies at the end of July were up 300,000 head over July 31, 2019. Unlike the U.S. situation, cow-calf producers in Western Canada didn’t alter their marketing schedules this past spring on a large scale. The Alberta and Saskatchewan cattle-on-feed inventory as of July 1 was 943,959 head, up five per cent from last year and up 17 per cent from the five-year average. Feeder cattle placements during June were 82,459 head, up six per cent from June of 2019 and up nine per cent from the five-year average.

As of early August, October live cattle futures were trading around $108 while the April 2021 contract was just above $115. On the quarterly beef production estimates table, the USDA is forecasting first-quarter production for 2021 at 6.8 billion pounds, down approximately 100 million pounds from the first quarter of 2020. The potential for lower beef production during the first quarter of 2021 is the main factor driving the nearby yearling market. Ranchers with yearlings will want to sell them sooner rather than later in fall.

The second factor influencing nearby feeder cattle prices is the potential for lower feed grain values this fall and winter. The U.S. corn fundamentals are extremely burdensome and we’ll see significant volumes of U.S. corn trade into Southern Alberta. The feed barley situation is somewhat uncertain. Grain traders are having a difficult time coming to terms with the average yields in Western Canada due to the variable crop conditions. Secondly, Chinese demand may be larger than earlier anticipated. In the short term, the outlook for feed barley and corn is bearish from current levels.

On a side note, this market environment is shaping up to be similar to 2009 and 2010. The U.S. cattle herd is contracting while the U.S. and world economies are coming out of a recession. The USDA estimated the 2020 calf crop at 35.8 million head, down 257,000 head from 2019. This is the second year in a row of contraction. There is potential for a major inflationary period over the next couple of years and with the economy improving, this is bullish for feeder cattle prices longer term. We’re going to have severe seasonal swings; there is no doubt about it; however, the longer-term trend is upward.

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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