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Feed grain prices expected to remain high

Market Update with Jerry Klassen: More likely to find better calf market closer to year-end

Feed grain prices expected to remain high

There are always a lot of factors affecting the North American beef market, but this month’s take-home message is to look for the fed cattle market in Alberta to reach seasonal highs during November. We could see Alberta fed cattle prices reach up to $165 delivered. Yearling prices are expected to increase $5 to $8 over the next couple of months. Calf prices are expected to remain flat through October and then trend higher in November and December. Don’t sell your calves in October. Try to take them to over 700 pounds and sell them in the final months of the year if possible. You may have to buy feed and do a little extra work but you will be rewarded for it.

Market activity over recent weeks shows Alberta packers were buying fed cattle in the range of $148 to $150 f.o.b. the feedlot during the first week of August; down from $164 to $165 during the last week of June. The market has come under pressure due to larger supplies of market-ready cattle in Alberta and Saskatchewan.

While Canadian values have been grinding lower, the U.S. fed cattle market has traded in a sideways range over the past month. Live prices in Nebraska were quoted at US$125 during the first week of August, unchanged from 30 days earlier. The U.S. is in an opposite situation to Western Canada and market-ready supplies are down sharply from August of 2020 and 2019.

Beef demand continues to improve as more Americans and Canadians get vaccinated. U.S. restaurant traffic is running similar to 2019. Over the past month, we’ve seen a sharp improvement in Canadian restaurant traffic which is now just marginally lower than 2019.

Unemployment rates are improving and consumer spending is expected to run seven to eight per cent above year-ago levels for the remainder of 2021. Yearling prices have been trading near 52-week highs. As of early August, larger-frame mixed steers fresh off grass averaging 900 pounds were quoted from $185 to as high as $190. Calves are down $10 to $15 from last month as barley continues to trade near historical highs. Strong feed grain values appear to be weighing on calves more than yearlings.

Variable basis figures

The Alberta fed-cattle basis can be quite variable. During June, market-ready fed cattle numbers in Alberta and Saskatchewan were down about 50,000 head compared to June 2019. The domestic market had to trade at a premium to the U.S. to secure supplies. We’ve now transitioned to a period where market-ready supplies are up 40,000 to 50,000 head compared to August 2019. The Canadian market is now at a minor discount to Nebraska values. There has been significant basis depreciation over the past month.

In the U.S., market-ready supplies of fed cattle will drop sharply below September 2019 levels, which will be positive for the live futures market and the Nebraska basis. We don’t see much slippage in the Alberta market from current levels because fed cattle exports are projected to increase during September through December. Given our projections for the U.S. slaughter, fed cattle supplies will be rather snug south of the border for the remainder of the year.

For the week ending August 6, wholesale choice beef prices were quoted in the range US$290 to $292/cwt. This is up about US$30/cwt from last month and up $75/cwt from last year. The July Grainews column mentioned that packers were in the process of renewing longer-term contracts with retail grocers and restaurant chains. This has been very supportive to fed cattle prices.

Consumers spending more

A one per cent increase in consumer spending equates to a one per cent increase in beef demanded. U.S. consumer spending during the second quarter was up 9.5 per cent from year-ago levels. Canadian consumer spending was somewhat sluggish in the April through June period with social constraints across most provinces. However, during the third quarter, both Canadian and U.S. consumer spending is expected to be up seven to eight per cent from year-ago levels.

The U.S. consumer saved up approximately $1.8 trillion during the COVID pandemic. Financial estimates suggest that the U.S. consumer has only spent approximately 30 per cent of the savings. Therefore, strong consumer spending is in the forecast for the remainder of the year. Without going into detail, there is potential for a surge in spending in the final quarter of 2021. Beef demand tends to peak around the U.S. Thanksgiving, which is the most travelled holiday in the U.S.

The feeder market is in a very precarious situation. Feed barley has been trading in the range of $400/tonne to as high as $415/tonne in Lethbridge. The Canadian barley carryout was historically tight for the 2020-21 crop year. We now have lower-than-expected barley production due to the drought in Western Canada. Barley prices have potential to drop $40/tonne to $50/tonne over the next month due to harvest.

Once we move into November, we’ll see more U.S. corn trade into Alberta. This environment is supportive for the calves. Yearlings have held up because major operations booked their new-crop barley requirements earlier in spring. Therefore, they are not getting hit as hard with the record-high prices. Earlier in April, we advised feedlots to book the feed grain requirements and then buy the feeder cattle.

The drought conditions in the U.S. and Western Canada have contributed to herd liquidation and the lower calf crop projections for 2021. We’re now seeing an increase in feeder cattle placements in Canadian and U.S. feedlots. The U.S. cow slaughter is also running ahead of a year ago. We’re looking for a year-over-year decline of 400,000 to 500,000 head in the U.S. calf crop. The 2021 Canadian calf crop is expected to be down 100,000 head from year-ago levels. This year is shaping up to be very similar to 2012 for U.S. cattle producers. Remember the feeder market trended higher from 2012 through 2014. Lower supplies of feeder cattle will result in higher prices next spring.

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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