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EU Instability Affects NA Markets

European economic instability appears to be shaking North American equity and energy markets. Economic gains made since last October have stalled for the time being and it looks like consumer confidence could erode into the summer the months. Consumer expenditures are the largest factor influencing beef demand and cattle merchants remember how consumption patterns can shift when average earning potential declines. Beef packers realized softer demand after retailers covered their Memorial Day requirements and the beef market couldn’t recover. Wholesale values started to fade from highs not seen since the energy rally of 2008. Weaker wholesale beef values spilled over into live cattle prices and set a psychological negative tone in the feeder market. Investment funds pushed cattle futures to the historical highs, but when they started to exit long positions, the commercial traders were sitting on the sidelines given all the economic uncertainty. Alberta fed cattle prices were trading in the range of $90 to $91/cwt in late May, down $4/ cwt from the highs earlier in the month. In late May, CME live cattle futures were $5/cwt off the highs and feeder cattle futures had dropped $8/cwt.

Cattle on feed in Alberta and Saskatchewan as of May 1 were 1.027 million head, up 10 per cent in comparison to May 1 of 2009. Feedlot placements during Alberta totalled 155,005 head, up 19 per cent from last year, while marketings were reported at 148,000 head, also up 19 per cent over April of 2009.

Slower exports of feeder cattle during the winter and spring have resulted in higher feedlot numbers since February. The feeder market was functioning to encourage demand and local prices were at a discount to U. S. market. Feeder cattle exports improved in April and May and this will result in declining feedlot numbers in upcoming months while remaining above year ago levels into August or September. The Alberta fed-cattle market will continue to trade at a $6 to $9 discount to Nebraska values, depending on the exchange rate. This will also temper the upside in domestic Canadian feeder cattle prices into September. Canadian feedlot placements will be similar to year-ago levels in upcoming months now that feeder cattle exports to the U. S. have resumed to normal levels.

The USDA reported cattle on feed as of May 1 at 10.453 million head, down three per cent from May 1 of 2009. Placements were 1.629 million head, up two per cent over May of 2009 while marketings were 1.854 million head, down one per cent from last May. Cattle continued to be pull forward as feedlots take advantage of the higher prices. Lower carcass weights have caused the USDA to lower third and fourth quarter beef production estimates which will be supportive longer term. However in the short term, the market is contending with uncertain demand.

Stronger retail sales, gains in unemployment along with expanding GDP were key factors driving beef demand in the first half of 2010. It now looks like North American beef demand may ease moving forward as consumer confidence stalls out for the time being. There are quite a few factors tempering consumer spending in the short term. The Greek drama has overshadowed the Chinese equity bear market, which is also weighing on U. S. economic growth forecasts. The Shanghai index has dropped 20 per cent from the November high and concerns over Chinese monetary tightening could result in slower Chinese and U. S. growth. I’ve already mentioned European economic instability. Banks are regulated nationally, but have a global reach as we have learned in 2008.

Keep in mind the U. S. housing crisis is not over. More than 10 per cent of U. S. homeowners with a mortgage missed one payment in the first quarter of 2010. This is a record high and up 9.1 per cent from a year ago. Approximately 4.3 million U. S. homeowners or eight per cent of all Americans with a mortgage are still at risk of losing their homes. It will be difficult for additional consumers to increase beef consumption given the current economic situation. This would be needed to cause further upside in the beef and cattle markets.

Look for softer fed and feeder cattle markets in the summer months. The ability of the equity markets and North American economy to resume growth patterns will be key factors to sustain the current price structure for fed and feeder cattle.

Jerry Klassen is a commodity market analyst in Winnipeg and maintains an interest in the family feedlot in southern Alberta. He writes an indepth biweekly commentary called Canadian Feedlot and Cattle Market Analysis for feedlot operators in Western Canada. He can be reached by email at [email protected]or 204 287 8268 for questions or comments.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future. Do not use this information to make buying or selling decision because adverse consequences may occur. This information may be wrong and may not be correct about current market conditions in all areas of Canada. This is an opinion only and not based on verified facts.

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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