The market outlook for fed and feeder cattle is looking brighter compared to a month ago. Beef demand is coming in larger than anticipated due to the corporate and personal tax cuts south of the border.
Recent U.S. data shows that restaurant spending was up nearly 10 per cent over year-ago levels during the summer months. This trend will likely continue in the fall as beef demand tends to make a seasonal high in November. Retail grocery spending usually peaks in December. The year-over-year increase in demand is offsetting the rise in beef production, which has resulted in stronger fed cattle prices.
Alberta feedlot margins are currently hovering around breakeven but strength in the deferred live cattle futures reflects positive margins for the final quarter of 2018. Yearling prices have been red hot with buying interest surfacing from major operations in Alberta along with Eastern Canada and south of the border. The current factors that have contributed to the nearby price structure are forecasted to improve over the next month.
Alberta packers were buying fed cattle in the range of $145 to $147 on live basis in late September. However, strength in the December live cattle futures suggests that Alberta fed prices could rally $8 to as much as $10 during October and November. While the USDA is forecasting a sharp year-over-year increase in fourth-quarter beef production, the jury is still out on actual supplies of market-ready cattle.
When I look at the placements by weight category on previous cattle-on-feed reports, it appears there a pocket in late October and November when market-ready supplies will drop sharply below year-ago levels. I wouldn’t be surprised if the USDA lowered its fourth-quarter beef production estimates on subsequent WASDE reports.
Consumers are spending
One can’t underestimate the surge in economic activity due to the corporate and personal tax cuts. It appears that the full extent of higher take-home pay was realized in June and consumers were quick to celebrate. U.S. consumer spending at grocery stores is coming in three to five per cent above year-ago levels. However, during the second quarter, restaurant spending was up approximately 10 per cent. U.S. hourly wages are also 2.5 per cent higher than last year as the labour market tightens. Canadian year-to-date beef and veal exports for the week ending July 31 were up seven per cent over last year; however, this will likely increase in the final quarter when U.S. beef demand makes a seasonal high. A weaker Canadian dollar has enhanced U.S. demand for Canadian beef products.
As of late September, western Canadian yearling markets were making fresh 52-week highs. In central Alberta, it was not uncommon to see higher-quality 850-pound steers trade in the range of $200 to as high as $207. It appears that feedlots have bid up the price of yearlings so that there is minimal margin in the first quarter. We’ll need to see stronger live cattle futures to justify higher feeder cattle prices. Another factor contributing to the strong feeder market is the weaker U.S. corn prices. U.S. feedlots currently have a competitive advantage over Alberta operations given the lower feed grain prices. Canadian year-to-date exports of feeder cattle and calves were up a whopping 56 per cent over year-ago levels for the week ending September 8.
There are a couple of factors that have come to light over the past month in the feeder complex. First, the recent Alberta and Saskatchewan cattle-on-feed report showed that feedlot placements during August were up 19 per cent over last year. The drier conditions across the prairies caused ranchers to market feeder cattle sooner than normal. Therefore, available supplies in November and December are expected to be down from year-ago levels. Secondly, it now looks like Western Canada will have six to eight million tonnes of feed wheat due to the adverse weather during September. World feed barley supplies are historically tight, which will keep feed barley prices firm throughout the winter; however, feed wheat prices are expected to soften and this may result in lower input costs for Alberta feedlots.
I’m advising cow-calf producers to take advantage of the current prices. It’s difficult to justify holding onto yearlings and calves given the current feed grain prices in Western Canada. Backgrounding operations should be fully hedged up this fall when buying their calves. Buy the price insurance at the same time that you buy calves. The risk-reward favours the downside next spring. Feedlot operators should also look to hedge up about 50 per cent of their production later in November when fed cattle prices are expected to make seasonal highs. It looks like the fed cattle market will experience a similar pattern as last year over the winter period.