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Demand continues for U.S. beef

Market Update with Jerry Klassen: American consumers have more disposable income

As of mid-December, Alberta fed cattle were trading in the range of $152 to $155, up approximately $10 to $12 from a month earlier. The February and April live cattle futures continued to trade near contract highs due to the uncertainty in beef production during the first quarter of 2020. It appears that beef production from January through March of 2020 will drop below year-ago levels.

Packing margins remain in healthy territory and packers are processing as many cattle as they can get their hands on. Carcass weights are starting to decline in Alberta and this trend is expected to continue into the spring. Current feeding margins are hovering around breakeven, but profitability is expected to improve. Feeder cattle prices are relatively unchanged from last month.

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We’ve seen a year-over-year increase in U.S. feeder cattle imports, which has limited the upside potential for Canadian prices. Weaker feed grain values in Western Canada have contributed to the higher import pace. In central Alberta, medium- to heavier-flesh tan steers weighing just under 850 pounds were quoted at $188 in mid-December; mixed steers averaging 675 pounds were valued at $197 while Black Angus-based, vaccinated steer calves weighing 510 pounds were selling for $234.

From May through August of 2019, U.S. feeder cattle placements under 700 pounds were sharply below a year ago. In Alberta and Saskatchewan, the placements were also marginally lower in the lighter weight categories.

I’m expecting this placement schedule to translate into lower fed cattle supplies during the first quarter of 2020. On subsequent cattle-on-feed reports, the placements in the 800-pound-plus categories have come in above a year ago, but not significantly enough to offset the declines of lighter-weight categories earlier in summer. The USDA is forecasting first-quarter beef production to finish at 6.515 billion pounds, up 100 million from the first quarter of 2018. However, I’m forecasting the production to come in under 6.2 billion pounds. Given the strength in the cash and futures market, the trade appears to be concerned that first-quarter production will be lower than expected.

The U.S. consumer is in a unique situation this year. Average wages are up about 3.2 per cent over a year ago, which is higher than the inflation rate of about two per cent. Given the increase in wages, the average American is in a position to increase savings while continuing to spend. Consumer spending has been a major pillar of the U.S. economy over the past year and this has contributed to stronger beef demand.

The U.S. Federal Reserve has lowered interest rates three times in 2019. There is a very high probability we’ll see significant wage inflation during 2020, which will underpin beef prices. U.S. wholesale beef prices are trading near historical highs. Average ground beef prices in the U.S. are up about 3.4 per cent from last year, but higher-end cuts are similar to year-ago levels. January and February are periods of slower consumption but I’m expecting a very strong fed cattle market during March and April.

Feed grain supply increases

Statistics Canada estimated Canadian barley production at 10.4 million tonnes (mt) in its December crop report, which was up from the 2018 harvest of 8.4 million mt. In addition to the larger barley crop, Western Canada is contending with about five million mt of feed wheat.

Minneapolis wheat futures have been trading near contract lows causing the milling wheat premium over feed to narrow. Western Canada is contending with burdensome feed grain supplies but corn supplies in the Northern Midwest and Northern Plains are below a year ago. Official data has Canadian cattle imports for October at 49,503 head, up approximately 11,000 head from October of 2018. November data will likely show a similar year-over-year increase. To put this in perspective, Alberta and Saskatchewan cattle-on-feed inventories are 12 per cent above the five-year average, while the 2018 Canadian calf crop was the smallest in the last 11 years.

Another factor to consider is that beef production will be rather burdensome in the second and third quarters of 2020. Again, as of mid-December, the August live cattle futures were trading at a $10 discount to the April contract. Calves coming on the market now to be sold as fed cattle during July and August will face a very soft fed cattle market. Therefore, I’ve been advising cow-calf producers and backgrounding operators to be more aggressive with their purchases of price insurance. Producers want to be hedged up protecting their downside risk. Don’t expect too much upside in the feeder market. During the last three years, yearling prices have trended lower from December through April.

Featherlight calves (under 500 pounds) appear to be fairly valued. Next spring, U.S. corn acres are expected to be up five to six per cent over 2019, which will result in burdensome corn supplies during the fall of 2020.

It appears we may see a slight year-over-year decline in the U.S. calf crop as well. Yearling prices next fall have potential to be very hot and calves will likely trade $10 to $15 higher than prices experienced this past fall. The feeder market will divorce from the fed cattle market during August and September of 2020.

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain trader GAP  SA Grains and Produits Ltd., and is president and founder of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204 504 8339.

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