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Higher production keeps beef prices under pressure

Market Update: Slaughter numbers are down, but carcass weights are up

Fed and feeder cattle prices have come under pressure over the past couple of weeks as the market absorbs the year-over-year increase in second quarter beef production. Cattle-on-feed inventories in Canada and the U.S. are running slightly above year-ago numbers, but carcass weights are sharply higher.

Despite the lower cattle prices, retail beef prices are only marginally lower, which has caused consumptive demand to stagnate. Feeder cattle prices remain under pressure as margins continue to drift deeply in red ink. Earlier in April it was thought weaker feed grain values would be supportive for replacement cattle, but despite the increase in U.S. corn and Canadian barley acres, feed grain values have increased adding a second negative factor to the feeder market.

U.S. cattle on-feed inventories as of April were 10.9 million head, up one per cent from April 1, 2015. Placements during March were 1.9 million head, up five per cent while fed cattle marketings were up seven per cent. We’ve seen a surge in placement numbers since February, which will ensure feedlot numbers stay above year-ago levels into the summer months. At the same time, carcass weights are running 17 pounds above year-ago levels. During the third week of April, beef production was nearly 10 per cent above last year for the same timeframe. On the latest USDA WASDE report, they increased second and third quarter beef production estimates.

Cattle on-feed in Alberta and Saskatchewan as of April 1 were 941,000 head, up seven per cent from April 1 of 2015. The Canadian year-to-date slaughter is running two per cent below last year while actual beef production is up five per cent. This is largely due to larger carcass weights which are nearly 90 pounds higher compared to April of 2015. The U.S. is absorbing the larger Canadian production with exports of frozen and chilled cuts up nine per cent over year-ago levels. This export pace may start to slowdown with the stronger Canadian dollar. Basis for fed cattle have been abnormally strong for Canadian feedlots. Exports of slaughter steers and heifers are up 32 per cent over last year as of April 9.

Alberta packers were buying fed cattle in the range of $160 to $162 in late April, which is down about 20 per cent from April of 2015. U.S. fed cattle prices have shown a similar decline. Despite the weaker cattle prices, U.S. choice wholesale beef values were quoted at US$222/cwt, which is a year-over-year decline of about 16 per cent.

When we look at U.S. retail prices, ground beef is only down about six per cent while higher end cuts are only five per cent below year-ago levels. The ability for retailers to hold up prices has tempered beef consumption. Restaurant values have shown minor adjustments but no real change. It always takes longer for retail prices to decline. However, over the next couple of months, we need to see a sharper drop in retail values to avoid a build up of beef in cold storage. If we don’t see this occur, it would cause fed cattle prices to overextend the downside until production starts to decline in the final quarter of 2016.

U.S. away-from-home food spending dropped 3.2 per cent in comparison to March of 2015 while at-home spending was up 2.4 per cent. We are not seeing significant improvements in unemployment levels, consumer confidence and overall economic date that would stimulate beef demand with prices still near historical highs.

I’m expecting to see Alberta fed-cattle prices grind lower into the summer and early fall. Keep in mind September is a period of seasonal low demand and this will probably be the lowest prices for fed cattle during 2016. Feeder cattle prices will trend in line with the fed market. Negative feeding margins will continue to erode equity weakening the buying power of finishing feedlots. As of late April, barley prices were slowly strengthening and it appears the 2015-16 barley carry-out may be tighter than earlier projections.

I mentioned in previous articles that feedlots are being more prudent in feeder cattle purchases. The early fall period will likely be the lows for feeder cattle because of the weakness in slaughter prices. If the fed market overextends to the downside, this will be the opportunity for feedlots to reload on feeders. For the cow calf producers, next fall you’ll probably want to market your calves later or even background over the winter. Avoid marketing in August and September.

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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