In my previous article, we mentioned that the cattle market was in a transition phase. Market-ready supplies of fed cattle during April were relatively tight while beef demand was moving through a seasonal high.
The fed and feeder cattle markets softened during May as beef production grew. North American beef demand is considered inelastic so a small change in supplies can mean a huge change in price.
Alberta packers were buying fed cattle in the range of $154 to $156 during the second week of May, down from the highs of $163 in late April. The feeder market has also been trending lower. Old-crop feed grain prices remain strong and the October live cattle futures dropped from the contract highs of $121 to contract lows near $106 within 21 days. At the time of writing, larger-frame Angus mixed steers weighing 835 pounds were quoted at $186 in central Saskatchewan, while their similar-quality heifers averaging 825 pounds were valued at $174. Feedlot margins have dipped into negative territory and there is potential for significant equity erosion during the summer. Weaker fed-cattle prices during the fall timeframe along with ongoing negative feeding margins will weigh on feeder cattle prices.
During the winter and spring of 2018, the U.S. Southern Plains experienced drought-like conditions which caused feeder cattle to move off small-grain pasture sooner. This year, Kansas has experienced greenhouse conditions. Feeder cattle were placed later than last year and feedlot placements during March and April came in above year-ago levels. On the quarterly production estimates, the 2019 first-quarter production was actually 51 million pounds below year-ago levels. Second-quarter production is projected to come in 66 million pounds above last year. This amount will have minimal effect on the domestic market given the increase in beef exports. The most noticeable year-over-year changes occur in the third and fourth quarters. It’s quite easy to make the case that in each of the third and fourth quarters, production will be up 200 million pounds over year-ago levels.
Burdensome supplies in Canada
Canada has also been contending with a burdensome supply. For the week ending May 4, the year-to-date Canadian slaughter was 1,040,356 head, up 74,111 head over the same time last year. Secondly, Canadian exports of slaughter cattle to the U.S. for the week ending April 27 were 165,803 head, up 35 per cent or 42,977 head from last year. The Canadian fed market has traded at a discount to U.S. values for most of 2019 as the market functions to encourage demand.
The U.S. economy remains red hot with historical-high consumer confidence, record-low unemployment and mild inflation. Wages are up approximately three per cent over last year. The economy continues to adjust to the personal and corporate tax cuts from March 2018. To put the inelastic demand concept into perspective, it appears that every American will have to eat another half a pound of beef in the third quarter compared to last year.
In the latter half of April, the managed money had a record-long position on the live cattle futures while the commercials had a record-short position. Commercials are traders like the large packers. Therefore, if they have a record short on the futures, they have a record long in the cash market. In late April, some packing plants in the U.S had 75 per cent of their May requirements on the books while others had just over 50 per cent coverage. The commercial short position is always something to monitor because this is a very negative signal for the market when it nears record levels.
The fed-cattle environment dictates the feeder market. At the same time, the feeder market is the live cattle five months forward. For example, the November feeders are the April live cattle. The April 2020 live cattle has dropped from the contract highs of $127 to the contract lows of $115. Compared to last month, the 800-pound steer for November delivery has lost about C$200 in value. The cow-calf operator needs to watch the deferred live cattle futures for nearby market direction at the local auction. Readers that have followed my articles earlier in the spring, know I was quite bearish on the feeder market for the fall timeframe. If you haven’t taken any price protection on your fall feeder marketings, it’s too late at this time and you’ll have to ride all risk in the cash market.