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Feeder prices divorce from fed cattle market

It will take time to work through the backlog of market-ready cattle

During the third week of May, Alberta fed cattle were selling in the range of $150 to $153. However, the backlog of market-ready supplies has caused prices to come under pressure. A month later in the last week of June, Alberta fed cattle prices were averaging $123 on a live basis.

During the same period, feed barley prices had risen by approximately $10/mt. For the week ending June 27, feed barley was trading from $240/mt to $245/mt in the Lethbridge area and $225/mt to $237/mt in the Red Deer region.

Feedlot margins have been in negative territory since March with break-even pen closeouts in the range of $155 to $161 throughout the spring. While fed cattle prices have been trending lower, the feeder market has been surprisingly strong. As of late June, tan steers averaging 725 pounds were quoted at $205 in east-central Alberta while similar quality and weight heifers were valued at $184.

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The thinking is that by the time these feeders come on the fed market, the backlog of supplies will be alleviated, but this may be optimistic thinking. Western Canadian supplies of feeder cattle are rather snug compared to south of the border so the domestic market is trading at a premium to U.S. values.

As we move into July, the fed cattle set-aside program was having a limited effect on the market. Keep in mind that the year-over-year increase in feeder cattle placements last fall would have resulted in a larger fed cattle supplies during June and July. The slowdown in the slaughter pace during April and May amplified the burdensome supply for the summer. Fed cattle exports have been coming in larger than anticipated over the past couple months. It appears feedlot operators may have been more aggressive with their forward contracting for spring and summer fed cattle marketings. Despite the lower U.S. slaughter pace, Canadian fed cattle exports are actually running above year-ago levels.

U.S. cattle-on-feed inventories as of June 1 were 11.671 million head, relatively unchanged from last year; Alberta and Saskatchewan cattle on-feed numbers as of June 1 were reported at 1.023 million mt, up six per cent from June 1 of 2019. The on-feed numbers don’t appear to be overly strenuous for the market but these numbers should not be misinterpreted.

U.S. feedlot placements were down sharply from year-ago levels during March and April. It appears that the U.S. cow-calf and backgrounding operators held back on sales during the main COVID economic shutdown. In Western Canada, sellers of feeder cattle didn’t change their marketing schedule significantly. Without going into detail, at the end of June the backlog of market-ready supplies in Western Canada were estimated to be just over 300,000 head. In the U.S., the backlog of market-ready supplies was estimated to be just over one million head.

Heavier cattle going to market

The U.S. and Canadian slaughter pace is running just below pre-COVID levels, which is encouraging. Keep in mind that carcass weights are up sharply from year-ago levels. Therefore, even with the year-over-year decline in the weekly slaughter, weekly beef production has been exceeding year-ago levels. There are constraints on the slaughter pace both from the fabrication situation within individual plants but also from the demand perspective. The domestic and export markets can only absorb so much beef.

The government stimulus packages have actually resulted in higher incomes for the average Canadian and the U.S. worker. While wholesale beef prices are actually below year-ago levels, retail prices have not dropped at the same pace and most cuts are above year-ago levels. Retail prices always lag behind the wholesale market. Restaurants are opening up on a gradual basis but overall traffic is still down sharply from normal. The function of the wholesale and retail markets is to encourage beef demand through lower prices. Fed cattle prices will have a difficult time sustaining any strength until the backlog of market-ready supplies is alleviated. This could take eight to 10 months.

The feeder market has been trading at pre-COVID levels throughout June. Steer calves weighing 500 to 550 pounds have been actively trading from $230 to $240 in Alberta while yearling steers averaging 850 pounds have been selling in the range of $178 to $185. Basis levels on Western Canadian feeder cattle have been exceptionally strong.

It’s important to note that U.S. feeder cattle supplies outside feedlots as of April 1 were 20.539 million head, up 831,200 head from April 1 of 2019. While we don’t have actual data from Statistics Canada, it appears that feeder cattle supplies outside feedlots in Western Canada were similar to slightly lower than year-ago levels. Canadian feeder cattle prices have maintained a premium over U.S. values as the market functions to ration demand or curb exports.

Fed cattle prices are expected to have limited upside for the remainder of 2020 due to the excess supplies of market-ready cattle. The U.S. feedlot operator has held back on sales during the COVID-19 pandemic but the Canadian cow-calf and backgrounding operator has maintained a traditional market schedule. The U.S. feeder market has large supplies to absorb moving into the fall period, which will result in lower prices on both sides of the border.

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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