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Fed & Feeder Markets Inching Up

US fed prices soared higher in early April with Nebraska cattle trading at $100/cwt to $102/cwt on a live basis and $163/cwt on a dressed basis. This is approximately $4/cwt from historical highs. Choice wholesale prices reached to $165, the highest level since July of 2008. At the same time, fed steers in Alberta were trading in the range of $94 to $96.50 and heifers from $94 to $96 on a live basis; Alberta rail grade prices were in the range of $155/cwt to $160/cwt.

In previous articles, I’ve mentioned that improving demand due to strengthening consumer incomes would be the main factor driving prices higher. Business spending through restaurants is increasing; hotel and resort traffic is coming off the lows while leisure travel spending is showing signs life as summer approaches. It appears that the U. S. consumer is starting to spend money again, which is the backbone to the U. S. economy and also to the cattle and beef markets. Retails sales of all goods has shown significant increases in the first quarter of 2010 with noticeable advances in higher-end luxury items. This bodes well for the beef complex since a large portion is consumed by people with average to above-average incomes. Equity markets continue to trend higher which will result in additional hiring and lower unemployment levels. There has been a significant recovery in the U. S. banking sector which also confirms the U. S. economy is on stable ground. Another factor influencing beef demand is lower pork supplies. The contraction in the pork industry appears to be larger than earlier anticipated resulting in sharp drop in pork production. Lean hog futures have been trading near historical highs and this has spilled over into the cattle complex.

North American beef exports are expected to be the highest since pre BSE. The USDA recently increased their projection for 2010 given the stronger movement to Japan. Offal and tallow exports are also back up to pre-recession levels. Byproduct values, such as hide prices, have also recovered with the car industry using more leather for seats. All these factors have contributed to better packing margins.

U. S. beef production is coming in lower than earlier anticipated. Adverse feedlot conditions during late winter and early spring caused many cattle to be sold earlier than normal. Marketing weights dropped sharply as cattle were pulled forward for slaughter. This also encouraged the export demand for Canadian slaughter cattle and helped local feedlots become more current with production. Lower carcass weights caused packers to slaughter more cattle to satisfy their demand requirements. The market is still absorbing the effects of the winter period.

Fed cattle prices are expected to consolidate over the next couple months. We’ve seen a significant rally since late January and markets don’t go up forever. It is inevitable that the fed market is due for correction. There is potential for softer markets in June through August as market ready supplies increase. However, I don’t really see the fed cattle prices falling apart given the demand projections for the third and fourth quarters.

U. S. feeder cattle prices are moving in line with the fed market. Since January, U. S. feeder prices have been higher each week. In Western Canada, the feeder market continues to lack export demand as additional supplies are pushed into the domestic market. U. S. feedlot operators were noticing lower efficiencies and higher death loss when U. S. conditions were wet and rainy. We expect to see better export movement now that feedlot conditions have dried up.

Feedlot margins have improved but the deferred live cattle futures are somewhat undervalued compared to the nearby price structure. While nearby feeding margins are more favourable, the live cattle futures market isn’t showing profitability for the deferred months. This could temper the nearby upside in the feeder market, despite the tighter expected supplies for the summer period. Feedgrain prices have a seasonal tendency to strengthen in May and early June, which could also limit buying interest for feeder cattle. At this time, feedlots are having difficulty penciling in a profit on replacement cattle that will be fat in the September through December timeframe. Look for the feeder market to remain firm to slightly higher into the summer months as supplies tighten in line with the seasonal tendency.

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.

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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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