During the week ending May 8, Alberta fed cattle prices were quoted in the range of $158 to $162, up $8 to $10 from 30 days earlier. Wholesale beef prices continue to percolate higher as the U.S. economy moves through a major expansionary phase. Rising consumer incomes and stronger consumer spending will result in a sharp year-over-year increase in beef demand through the summer.
As of mid-May, higher-quality steers with medium to lower flesh levels averaging 850 pounds were trading from $178 to $183 in central Alberta; steer calves weighing 525 to 550 pounds were valued from $235 to $240 in the same region. The April 2022 live cattle futures reached over $133 in early May. This is the highest since June of 2017. The positive feeding margin structure in the deferred months is underpinning nearby calf values. There is renewed optimism in the cattle complex which is something we haven’t seen in a long time.
The U.S. and Canadian fed cattle market is in a unique situation. Seasonally, fed cattle prices usually trend lower from May through July, but this year the market is experiencing a counter-seasonal trend. Fed cattle supplies on both sides of the border are expected to drop below 2020 and 2019 levels this June and July.
At the same time, the Canadian and U.S. monthly slaughter pace is expected to be above 2019 levels. Wholesale prices are trading near historical highs which has enhanced the weekly processing pace. Carcass weights are expected to decline into the summer months. Feedlots will have the upper hand in negotiations given the tighter supply situation.
Consumers eat more beef
Americans and Canadians are eating more beef at higher prices. The U.S. economy accelerated by 6.4 per cent during the first quarter while the Canadian economic growth came in at 6.5 per cent. (seasonally adjusted annual rate). U.S. second-quarter GDP is projected to finish in the range of 10 to 13 per cent while Canada will edge up to seven to 10 per cent. Approximately 66 per cent of U.S. GDP is related to consumer spending. Therefore, we’re expecting stronger beef demand in the second and third quarters given the record-high GDP projections. As a rule of thumb, a one per cent increase in consumer spending equates to a one per cent increase in beef demand.
In the U.S., widespread vaccinations have caused restaurant traffic to increase. Restrictions have been easing in most states just in time for the barbeque season. Approximately 25 states don’t even have a mask mandate as of mid-May, while Canada is contending with another wave of COVID-19. Severe social restrictions are in place in most provinces but we should see some reprieve in 30 days. We’ve learned in the past that stronger retail demand can easily offset the slower restaurant consumption. I don’t feel this Canadian situation will have much of an effect on the beef market in the longer run.
Southern Alberta breakeven fed cattle pen closeout values for June and July are in the range of $154 to $157. For August and September, the breakeven fed cattle prices in the range of $152 to $155. Fed cattle prices during May have been averaging $160. If the fed cattle price can stay at the current levels, feedlot operators could have a positive margin structure through the summer.
This assumes that the operation booked their feed grain requirements earlier in spring. Barley and non-durum wheat stocks could drop to historically low levels at the end of the crop; therefore, we could see higher barley and spring wheat prices during the summer.
The feeder market is expected to trend higher during the summer for three main reasons. The feeder market is a pure competitive market. Feedlot operators will bid up the price of feeder cattle until there is no margin. New-crop barley has been trading around $270 which is a $70 discount to current levels. Lower feed grain prices during harvest will be supportive. Finally, western Canadian yearling supplies during August and September are expected to be down six to eight per cent from year-ago levels. Canada and the U.S. have experienced two consecutive year-over-year declines in the annual calf crops.
The one caveat is weather. As of May 9, approximately 44 per cent of the U.S. pastures were rated very poor to poor compared to only 16 per cent last year. In Western Canada, there are some very dry pockets across the prairies. The drier conditions in the U.S. are a major concern. Ranchers may liquidate the herd and bring calves to market sooner than expected if conditions don’t improve.
Fed cattle prices are expected to hover in the range of $155 to $160 during June and July. Yearling prices are expected to percolate higher through the summer and I wouldn’t be surprised to see 850-pound steers fresh off grass reach the psychological $200 level this August.
Calves are expected to trade sideways into the fall, with 600-pound steers averaging $225 through the summer. If below-normal precipitation materializes, we could see higher feed grain prices and ongoing pasture deterioration. This would cause ranchers to market calves sooner than anticipated. The larger available supplies could result in lower prices during the summer. This is the caveat on the price outlook.