Cattle Prices Remain Vulnerable

Canadian cattle prices held value throughout September but the market feels vulnerable moving forward given the weak economic environment. Alberta packers bought fed cattle in the range of $100-104/cwt in the early fall period. At the same time, prices in the U.S. Southern Plains were hovering between $116-$118/cwt.

U.S. cattle on feed numbers continue to run above year-ago levels and beef production will likely come in larger than earlier projections. However, domestic beef demand looks softer for the fourth quarter given projections for a contraction in consumer spending. Feeder cattle values have been relatively stagnant this fall but are poised to move higher later in winter. Stronger barley prices have tempered buying enthusiasm from major feedlot operators but lower available supplies will keep the feeder market well supported.

BULLISH

U.S. cattle on feed for slaughter as of September 1 totalled 10.7 million head, up five per cent from September 1 of 2010. August fed cattle marketings were up a whopping seven per cent in comparison to last year while feeder cattle placements were actually down one per cent in comparison to August of 2010. Analysts were expecting on feed numbers to be up seven per cent, placements to be up eight per cent and marketings up five per cent. Therefore, all categories were considered bullish for the feeder and fed cattle markets. The drought in Texas, Oklahoma and Kansas resulted in feeder cattle being placed sooner than normal. It now appears that placements will continue to be below year ago levels throughout the final quarter of 2011 and 2012.

Fourth quarter U.S. beef production for 2011 is expected to be down 240 million pounds from last year. First-quarter 2012 production is projected to drop nearly 300 million pounds in comparison to the first quarter of 2011. Overall, 2012 beef production is expected to be down a whopping 1.165 billion pounds relative to 2011. This will bode well for Canadian cattle and beef exports next year.

Cattle on feed in Alberta and Saskatchewan as of September 1 were 622,289 head, also up five per cent in comparison to September 1 of 2010. Placements were up one per cent in comparison to August of 2010 and marketings were down one per cent from last year.

CURRENCY CHANGES

Our Canadian market has been struggling due to the stronger Canadian dollar, but we now find the market structure changing. The U.S. federal reserve announced that it will sell short-term bonds and use the money to buy up longer term bonds. This in essence drives up U.S. short term yields and is friendly for the U.S. greenback and bearish for the Canadian dollar. If the Bank of Canada also decreases its overnight lending rate, this would further weaken our Canadian dollar. In any case, we should see Canadian cattle prices gain on U.S. values over the next six months.

Seasonally, beef demand declines from the late September through November. Restaurant and grocery store spending slows by nearly seven per cent during this period, which causes beef consumption to ease. Wholesale beef prices are expected to come under pressure in the short term; therefore, it will be difficult for cattle prices to move higher. We all remember the 2008 meltdown and the economy is moving in a similar fashion. High unemployment, weak consumer confidence and a contraction in retail spending will continue to temper beef demand.

From January 2008 through December 2009, the correlation between the weekly close on the Dow Jones Industrial Average and Live Cattle futures was 0.65; from January 2010 to August 2011, the correlation jumped to 0.9. There is a very strong direct relationship between the Dow and Live Cattle Futures because consumer spending is responsible for overall U.S. economic strength and beef demand.

TAKE PROTECTION

Deferred live cattle futures have been trading near historical highs and I feel it is prudent that cattle producers take some protection for their winter and spring marketings. Beef production estimates could come in larger than expected because on-feed numbers are higher than last year. Domestic and export beef demand could drop sharply if the stock market continues to grind lower. China, Europe and Southeast Asian economies are vulnerable to recessionary pressures. Cow-calf producers should also look at some price protection because the corn and barley fundamentals are historically tight. Feeder cattle will move in line with the fed market as feeding margins move into negative territory. We all know how the market can change within a six-month period.

GeraldKlassenanalyzescattleandhogmarkets inWinnipegandalsomaintainsaninterestin thefamilyfeedlotinSouthernAlberta.For commentsorspeakingengagements,hecan bereachedat [email protected] or2042878268.

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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