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Producers in Alberta and Saskatchewan will be looking for grass cattle in spring

The cash cattle market appears to have stabilized for the time being. Fed steers were trading at $82 in the US Southern Plains while the carcass trade was quoted at $132 in Nebraska. At the same time, market ready cattle were selling in the range of $85 to $87 in Alberta. Supplies of market ready cattle in the US are tighter which has been supportive for the cash and futures markets. However, retail and restaurant demand remains sluggish and a decrease in consumer income will temper strength in the short term. Boxed beef values were quoted at $136/cwt for choice product and select prices were hovering at $134. Demand for higher end cuts of beef has deteriorated weakening the value of the overall carcass. Packing margins are slightly in the black but with building wholesale supplies; packers are hesitant to increase the weekly slaughter pace.

To reiterate from my previous articles, the placement structure during the fall period of 2008 suggests that supplies of market ready cattle should tighten in February and March. Packers may become more aggressive with purchases and start securing supplies for the next four to six week period. Commercial traders have been active buyers on the futures and this may be in anticipation of higher prices in upcoming weeks. Feedlots putting cattle up for bids in the US have reported fewer numbers and this trend should continue to the end of March.

Carcass values have eroded due to the narrowing of choice and select product values. According to USDA, demand has shifted away from hotel restaurant consumption but increased for at home select product and ground beef. The choice/select spread will continue to be under pressure throughout 2009. Growing unemployment data and lower consumer incomes continues to weigh on the cattle market. While this is a normal contraction phase in the economy, the negative economic data from housing to unemployment appears to be breaking historical records.

At some point in the future, the news will start to change and the data will not be as bearish. Keep in mind most analysts have already factored in nearly 10 percent unemployment by the end of 2009 for Canada and the US. The futures markets may be in the process of factoring in worst case scenarios. I think this psychology is adding some stability in the short term. For example, the day I was writing this article, US job data showed a loss of nearly 600,000 jobs in January and the Dow closed up over 200 points. This was the most bearish news we have seen but it resulted in a stock market rally. This may be occurring in the cattle market as well.

In conclusion, fed cattle prices have potential to strengthen into mid March but then trend lower from April through June. Anticipated strength in the Canadian dollar will also weigh on domestic fed cattle prices. Growing unemployment numbers in Canada and the US will result in lower demand. North American consumers are facing larger supplies of all meats which is increasing competition and resulting in lower retail prices. Weakness in higher end cuts of beef will also result in lower carcass values. The most bearish news may be factored into the equity and commodity futures markets resulting in price stability in the short term.

Focusing on the feeder cattle, we will likely see further contraction of the US and Canadian cattle herds in 2009. Strength in the feedgrain complex and lack of profitability in the feedlot sector will cause feeder cattle prices to stay relatively flat in the short term.

I think we could see some strength in feeder cattle prices in spring for grass cattle. Talking with many cow calf producers, there has been a liquidation of cows over the past year and these producers in Alberta and Saskatchewan will be looking for grass cattle in spring. Pasture conditions at this time are expected to be excellent given the precipitation over the winter. Longer term, beef supplies are expected to tighten significantly at the end of 2010 and 2011 due to expansion in the cattle herd. This will cause a decline in available heifer numbers for slaughter and may cause a reduction in the beef production. The industry will probably have to wait until the latter half of 2010 before this expansion phase begins. Feeder cattle prices may be at or near the lows. I don’t see too much downside from the current levels.

Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For questions or comments, he can be reached at [email protected]or 204 287 8268.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.

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