Your Reading List

If you see a profit, take it

Markets have improved, but it likely won’t last

Fed and feeder cattle have been percolating higher over the past month as the market moves through a period of seasonal low beef production. Restaurant traffic sharply improves in March and April, and retail beef movement also increases. Consumers generally start eating more once spring rolls around and this year, the health of the overall economy has spurred on consumer spending.

Retail beef prices continue to trend lower so the market is encouraging demand. At the same time, wholesale prices have strengthened, jumping sharply in recent weeks allowing packers some breathing room on purchases. Alberta packers were buying fed cattle in the range of $165 to $168 in mid-March, the highest levels since February of 2016.

Feedlot margins have also reached colossal proportions. Fall-placed yearlings were purchased after huge losses in the previous 13 months but there’s been a significant shift in market fundamentals since. As of late March, larger-frame, medium- to lower-flesh steers weighing just under 850 pounds sold for $170 landed in southern Alberta while calves just under 500 pounds reached $230.

Renewed optimism, but…

The cattle complex has renewed optimism and I’ve tempered the downside in my price outlook from earlier in fall. However, producers need to be aware that market is factoring in a prodigious year-over-year increase in beef production during the second and third quarters.

U.S. first-quarter beef production will finish marginally higher than last year. However, I want to draw attention to the second and third quarters, which reflect a year-over-year increase exceeding 400 million pounds. The 2016 calf crop came in one million head above 2015 so this means more feedlot placements, higher cattle-on-feed inventories and larger overall beef production. The Canadian calf crop for 2016 was only 50,000 head above 2015. However, Canadian beef production is also marginally exceeding year-ago but supplies are tempered with lower carcass weights. I believe we’ll see the weekly slaughter pace increase later in May and June so beware if the cash trade starts to turn.

Product didn’t move

One major reason cattle prices overextended to the downside last fall was the inability of the retail market to move product while supplies were building. Cold storage stocks increased while wholesale prices deteriorated and this environment resulted in a very weak price structure.

The picture has now changed. Retail beef prices have dropped to levels where the average- to lower-income consumer can increase purchases. Positive job data has also spurred on beef consumption with a mild winter. Construction in the U.S. didn’t slow down as much as anticipated but actually bolstered job numbers throughout January and February. The average Joe was able to maintain a normal diet over the past five months. Higher-end consumers are also reaping the rewards of a historically high stock market. White tablecloth restaurants have experienced a very prosperous first quarter coming on the heels of a strong 2016. Airline travel was at record highs in 2016.

Average U.S. retail price for ground beef ($ /lb)
photo: Source: USDA

Sell or background?

I’ve received many calls from cow-calf producers wondering if they should sell their calves now or place on grass for the summer. Backgrounding operators are also asking if they should finish their cattle or sell now at 850 pounds.

My thoughts are to take advantage of the current prices. Those of you who have read may previous articles know that the fed cattle market will often pull up feeder cattle prices, especially when margins are quite profitable. I think it is prudent to take the profits and clear the table. Then reload with lighter calves and take some protection on the futures or with the Livestock Price Insurance program.

Feedlots will want to be aggressive with fed cattle marketings. The cash market is trading at a huge premium to the futures and it is only a matter of time before this relationship comes back in line. Feedlots will want to reload with shorter-keep cattle and instead of locking in with a plant, just ride the risk in the cash market because the basis is abnormally strong.

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.

Comments

explore

Stories from our other publications