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Short-term gains, long-term pains

The market still needs to discourage beef production — and that hurts

Fed and feeder cattle prices have been percolating higher recently as the markets adjust to lower-than-expected first-quarter beef production. Alberta fed cattle prices have been hovering in the range of $162 to $165, which is approximately $25 above break-even pen closeout values.

Healthy feedlot margins allowed feedlots to bid up feeder cattle prices. Larger-frame steers with medium flesh levels averaging 750 pounds traded from $177 to $180 in central Alberta in late January while similar quality 725-pound heifers were quoted from $160 to $163.

Packing margins have come under pressure recently, which has tempered the upside for fed cattle. Packers on both sides of the border were rather short-bought with this recent rally, catching many off guard. After stronger-than-expected beef demand in December, wholesale beef values started to trend lower in January and remain rather soft. Seasonally, retail and restaurant demand tends to weaken in January and February. Most consumers want to shed a few holiday pounds and pay off credit cards. This year, restaurant traffic has been further tempered by adverse weather which plagued much of North America during January. However, most importantly, retail beef prices continue to trend lower, enhancing demand. Margins from the retailer through to the cattle producer are now at more traditional levels.

Feedlot placements

Lower U.S. feedlot placements during the fall caused downward revisions in beef production estimates. From the fourth quarter of 2016 to the first quarter of 2017, beef production will drop by an estimated 565 million pounds, which is quite a sharp change in the fundamental structure.

December placements were a bit larger than anticipated so the USDA made an upward revision in second-quarter beef production from last month. The trade is anticipating a 200-million-pound year-over-year increase in second-quarter beef production followed by a 300-million yearly jump in the third quarter. Fed cattle prices are expected to make a yearly high in late March and then trend lower into the summer as beef production increases.

I’m expecting a similar price pattern as in 2015 although the potential is for prices to be about $10 to $15 lower given the increases in beef production. For information purposes, the U.S. 2016 cattle slaughter was nearly two million head above 2015. The 2017 cattle slaughter has potential to be one million head above 2016. Also, looking at the pork complex, it will experience a year-over-year production increase of nearly 1.3 billion pounds. In the latter half of the year, the function of the meat complex is to encourage demand through lower prices.

Market will call the shots

In Canada, beef production for 2017 will be very similar to year-ago levels because the calf crop hasn’t increased at the same pace as the U.S. Nearby basis levels have been rather strong given the lower first-quarter production in the U.S. I’m expecting a year-over-year increase in fed cattle exports to the U.S during the first quarter along with minor gains for exports of fresh and chilled cuts. However, U.S. demand will slow in the second and subsequent quarters.

In previous issues, I advised cow-calf producers to sell their 2016 calves as yearlings in the late winter or spring of 2017. This remains good advice given the recent rally in feeder market. Backgrounding operators are also in a favourable position after buying calves last October. However, looking forward, the feeder market will likely hold value into April/May. However, during the summer and fall of 2017, the feeder market has extreme downside potential. Cow-calf producers should place hedges or buy price insurance in March or April on their 2017 fall marketings. The lowest price for calves will be in late October and November, similar to 2016.

Feedlot margins during the fourth quarter of 2017 will be quite devastating. We have to go back to 2010 to find U.S. fourth-quarter production near 6.7 billion pounds to put the fundamentals and price structure in perspective. The market needs to discourage beef production and I’m looking for a sharper increase in the cow slaughter this fall. Without going into detail, feed grain prices are expected to be $25/mt to $30/mt higher during the 2017-18 crop year which will also weigh on feeder cattle prices.

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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