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Market saying ‘sell calves now’

Market Update: With current supplies prices will get worse before they get better


Alberta fed cattle prices were hovering in the range of $132 to $134 in late September as the market absorbs a large year-over-year increase in beef production. Wholesale values have been grinding lower throughout the fall while restaurant and retail demand move through a seasonal soft period. Carcass weights have been increasing and it appears that market-ready supplies are starting to build in the U.S. Southern Plains.

Alberta feedlot margins were quite profitable during the spring and summer but now losses are mounting to the tune of $250 to $300 per head. The negative margins structure has tempered the upside potential for the feeder cattle market. During the last week of September, 860-pound steers sold for $196 in central Alberta and higher-quality calves weighing 650 pounds were quoted at $220. Feed grain prices have been percolating higher throughout the fall, however U.S. corn is now starting to trade into southern Alberta. Feed barley supplies will be historically tight for the 2017-18 crop and feedlots are factoring in an additional $40 to $50 of input costs compared to last winter.

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Canadian numbers

Cattle on feed in Alberta and Saskatchewan as of September 1 totaLled 607,176 head, up five per cent from Sept. 1, 2016 but down four per cent from Sept. 1, 2015. Placements during August came in at 125,784 head, up 56 per cent from August of 2016 while fed cattle marketings during August were 181,086 head, up 15 per cent from last year. The Alberta and Saskatchewan cattle-on-feed report was considered neutral for the market. It is interesting to note that fed cattle exports were quite high throughout the summer. Feedlots are current with production and carcass weights are running at 908 pounds, down from 931 pounds last year.

U.S. cattle-on-feed inventories as of September 1 totalled 10.5 million head, up four per cent from 10.135 million head on Sept. 1, 2016. Traders and merchants viewed this number as slightly bearish because average trade estimates were only factoring a year-over-year increase of 2.7 per cent. Placements during August came in at 1.928 million head, up three per cent from August 2016. This was also a shock to the industry because pre-report trade estimates ranged from down 2.5 per cent to up four per cent over year-ago levels. This cattle-on-feed report confirmed the higher beef production estimates for the fourth quarter of 2017 and we may see some minor upward adjustments to the first quarter of 2018. August fed cattle marketings were 1.979 million head, up six per cent over last August and this was in line with pre- report estimates.

In the first quarter of 2018 U.S. beef production is expected to come in at 6.3 billion pounds, down from the fourth quarter of 2017 supplies of 7.2 billion pounds. The market is moving from a very burdensome supply situation into a significantly tighter situation.

As of Sept. 26, the October live cattle futures closed at $108 while the April contract closed near $119. The market is reflecting a $11 premium between October 2017 and April 2018. Looking at the feeder cattle futures, the November contract closed at $152 and the March contract closed at $147. Given the current market structure and outlook for beef production, how can cow calf producers use this information for the marketing or hedging strategy?

How to use the numbers

Currently, 860-pound steers are trading for $193 in central Alberta. Using a $1 cost per pound gain, the breakeven price for late February or early March delivery is about $155. Using a traditional basis of C$2.50, the expected fed cattle prices for March is C$144. This is about C$10 below break-even pen closeout values. This tells the cow-calf operator to sell yearlings now because these yearlings are slightly overpriced given the live cattle future.

As of early October, 550-pound steers were trading at $230 in central Alberta. The feeder cattle futures were at $152 and with a U.S.-Cdn. exchange of $0.81 therefore, the cash market is trading at C$42 premium to the futures market which is about C$30 above the historical average. The market is telling cow-calf producers to sell their calves now.

For feedlot operators and cattle producers in general, there is an important lesson we learned during the spring of 2016. Beef production will be quite burdensome in the fourth quarter but then drops sharply in the first quarter of 2018. When this occurs, the cash market usually leads the futures market higher and basis levels strengthen. This will cause feedlots to be more aggressive on fed cattle marketings from January through March.

The cattle market is going to factor in lower production for the first quarter of 2018 and sharp quarter-over-quarter increases for the remainder of 2018. Producers need to be cognizant of the market structure through this transition period to optimize their marketing strategy.

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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