Western Canadian cattle prices have been quite volatile over the past month. Alberta fed cattle prices climbed higher for seven weeks in a row from late November through the first week of January. Alberta packer bids rose from $147 to highs of $167 during this time. The finished market appeared to divorce from the live cattle futures; however, weaker fundamentals weighed on the price structure in mid-January, causing Alberta packers to lower their bids.
U.S. first- and second-quarter beef production is expected to finish above earlier projections due to the sharp year-over-year increase in placement numbers in the latter half of 2017. Changes in beef demand have also contributed to the rollercoaster market. U.S. beef demand moves through a seasonal high in November and December. From December through January, beef demand experiences a month-over-month decline of about 10 per cent.
Feeder cattle prices made fresh 52-week highs in mid-December. When auction barns opened the second week of January, feeder cattle prices were down about $10 from three weeks earlier. Feedlot margins have been hovering around $120 per head but it appears that lower fed cattle prices in the deferred positions will cause profitability to erode. Generally speaking, feedlot operators buy as many cattle as possible by mid-December. Therefore, demand for replacement cattle are saturated in January and only improves in mid-February, once feedlots liquidate a significant volume of fall-placed yearlings. It’s not uncommon for the feeder market to experience a softer tone in January.
In central Alberta, 850-pound larger-frame Charolais steers were quoted at $202 in mid-December. In early January, similar-quality cattle were trading around $188.
The year-over-year increase in the Canadian slaughter pace along with the year-over-year increase in fed cattle exports to the U.S. has drained market-ready supplies in Western Canada. Feedlots are fairly current with production with carcass weights running below year-ago levels. The function of the Alberta fed market is to ration demand by trading at a premium to U.S. prices. This is why the Alberta market has divorced from the live cattle futures and the U.S. cash market in the Southern Plains.
In the U.S., feedlot placements consecutively came in sharply above year-ago levels throughout the fall. This will result in a larger U.S. slaughter pace for the first half of 2018. The USDA has increased its first- and second-quarter beef production estimates. I’m estimating first-quarter beef production to even be higher than the USDA estimate by 140 million pounds.
The second-quarter production is expected experience a year-over-year increase of 670 million pounds. This is a fairly bearish scenario for the quarter. In Canada, I’m expecting the second-quarter production to be similar to year-ago levels so the Canadian market will maintain a premium over the U.S. prices. The U.S. fed cattle market is expected to trend lower in the second quarter.
It is important to realize that away-from-home food spending during January is usually about 10 per cent below the previous December. Food spending increases in March and early April. This surge in demand usually causes the cattle market to make a seasonal high in March. Demand stays relatively flat in the spring and early summer. August and September are also periods of seasonal low beef demand.
The fed cattle market is experiencing larger than expected production and seasonal low demand. Weakness in the live cattle futures has spilled over into the feeder market, making it difficult for cow-calf producers and backgrounding operators to buy price insurance or implement any type of risk management strategy.
I’ve advised cow-calf producers and backgrounding operators that they do not want to be holding feeder cattle past the middle of March. Remember, it’s a futures market. Traders are discerning the fundamentals in the deferred months and this can overhang the market in the nearby delivery positions. This is the second reason the cash market in Western Canada has maintained a strong premium over the futures market.
Feedlot margins are expected to remain positive into March, which should sustain the price of replacements. In the second quarter, feedlot margins will erode and by September and October, margins will have hovered in negative territory for about six months and there will be significant equity erosion in the feedlot sector.
The U.S. cattle herd will continue to expand and supplies will be extremely burdensome south of the border. The cattle market needs to discourage production and encourage the cow-calf operator to liquidate cows. This usually causes the feeder market to overextend to the downside. I’m extremely bearish on the feeder cattle market for next fall. The feeder cattle futures market tends to experience a seasonal bounce in March and this will be the time for cow-calf producers to buy price insurance on their fall marketings. This is not the year to wait for higher prices or better opportunities.