Cattle prices appear to be stabilizing as the market absorbs the surge in third-quarter beef production. Alberta packers have been buying fed cattle in the range of $145 to $148 in August while prices in the U.S. Southern Plains have been hovering around US$120. Wholesale beef prices have also held value, enhancing margins for packers. We’ve seen retail beef prices soften, which has strengthened demand at the consumer level. All these factors have supported the fed cattle market, which has spilled over into the feeder complex.
Early yearling sales have mixed steers weighing just over 900 pounds trading at $180 and 810 pound mixed steers averaging $192 in central Alberta. Western Canadian barley prices have dropped approximately $30/mt over the past month which has supported the feeder market. Feedlot margins have moved near breakeven levels and strength in the deferred live cattle futures has improved the outlook for replacements.
Supplies remain high
U.S. feedlot inventories have been running one to two per cent above year-ago levels through the summer months while placements are up three to five per cent. The USDA revised the third-quarter beef production estimate to 6.46 billion pounds, which is a 400 million pound year-over-year increase. Cash cattle prices will likely remain rangebound over the next month because of the larger supplies overhanging the market. Looking forward, the supply situation tends to marginally contract in the fourth quarter but still remains sharply above year-ago levels. In the first quarter of 2017, the market will be contending with the lowest quarterly production for the year.
For the week ending July 30, the Canadian cattle slaughter was up four per cent over year-ago levels. Year-to-date beef output reached 578,489 mt, which reflected a year-over-year increase of 10 per cent. Alberta and Saskatchewan feedlot inventories have been running four to five per cent above 2015 largely due to lower feeder cattle exports. I’m expecting the year-over-year increase in domestic beef production to continue for the remainder of the year and could actually expand further.
The U.S. economy is running on all cylinders with low unemployment levels, strong consumer confidence, and steady consumer spending. Away-from-home food spending continues to reflect a year-over-year increase of 3.5 per cent and per capita disposable income is slowly rising. Retail beef prices have also softened from the spring highs causing overall consumption to increase. U.S. at-home food spending has been hovering at 5.4 per cent above year-ago levels throughout the summer. I’m looking for seasonal trends in demand to influence the cattle market over the next year. We usually see a spike in restaurant spending in late November through December. January and February are very slow months followed by another sharp spike in March.
Better marketing in 2017
Currently, the live cattle futures appear to experiencing bottoming type behaviour as the burdensome supply situation eases. The market is expected to percolate higher in the fourth quarter as supplies decrease and demand improves. I’m expecting a rather stagnant market in January and February and then look for the seasonal highs to occur in mid March. Producers should not be over anxious to forward contract cattle. Once December 2016 comes around, producers can be more aggressive on their contracting program for all of 2017. Producers can leave some cattle that will be marketed in the first quarter unhedged. Keep in mind the futures will turn lower before the cash market.
I’m expecting the lows in the feeder market to be made in August and September. Similar to the fed market, feeder cattle prices are expected to percolate higher during the fall and winter period. Feed grain supplies will be burdensome for the 2016-17 crop year, which will be a major factor driving the feeder market higher. The cost per pound gain will be sharply below year-ago levels so feedlots will have additional buying power for replacement cattle.