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MARKET TALK – for Dec. 12, 2011

Lightweight feeder cattle have been selling at enormously high prices over the past month on both sides of the border. Peewee calves weighing 300 to

400 pounds sold in the range of $185 to $220 per cwt in southern Alberta, which is a record high. The USDA reported in Kansas that 100 steers averaging 359 pounds sold for $231 per cwt; 431-pound steers sold for $199. Producers are paying over $800 for a animal that will most likely reach slaughter weight in the final quarter of 2012. I ve had many inquiries from cattle producers asking why these cattle are so precious? In this article, I m going to discuss the main factors influencing the price structure for these expensive feeder cattle.

The U.S. beef cow slaughter from January through September of 2011 was 2.783 million head, up from 2.670 million head for the same timeframe last year. For 2011, the total beef cow slaughter is expected to finish at 3.775 million head, up 80,000 head from last year; total dairy cow slaughter is expected to come in at 2.970 million, also up 80,000 head over 2010. The dry area in Texas and Kansas remains a concern but the drought region is shrinking given recent rains. Cow-calf producers in the U.S. Southern Plains are now starting to feel comfortable with their current herd size given current feed and forage supplies. Producers in the Northern Plains are gearing up for expansion, similar to Canadian ranchers.

Given the higher cow slaughter, many analysts have lowered the 2011 calf crop projection. I m now forecasting the 2011 U.S. calf crop at 35.2 million head, down 480,000 head from 2010. For 2012, the U.S. calf crop is expected to dip to 34.612 million head which will cause of year-over-year decline of approximately 600,000 head.

Producers also need to remember that the market is encouraging expansion. We will see an increase in heifer retention throughout 2012 in all regions of the U.S., causing feeder cattle supplies to drop by an additional 300,000 to 400,000 head. If we take into account the lower calf crop and the heifer retention, the total feeder cattle pool will be down approximately one million head in comparison to 2011.

In previous issues, I ve mentioned that the most important factors influencing the feeder cattle price structure is the potential price at slaughter and the cost per pound of gain. The USDA recently lowered their beef production estimate for 2012. However, I specifically want to draw attention to the fourth quarter of 2012 where a year-over-year decline in production is estimated at 520 million pounds or eight per cent. December 2012 live cattle futures traded over $130 in November and the market is incorporating a risk premium due to the uncertainty in supply. Keep in mind that in bullish cattle markets, the cash leads the futures higher, exactly what the market is currently experiencing.

U.S. GDP grew by 2.5 per cent in the third quarter of 2011 which suggests consumer spending increased by approximately 1.75 per cent. A one per cent increase in consumer spending equates to a one per cent increase in beef demand. It now looks like the U.S. economy has weathered the second quarter economic slowdown and the business cycle will be in full-fledged expansion throughout 2012, raising beef demand. Unemployment will continue to decline and consumer confidence will start to percolate higher. U.S. offshore exports are also expected to increase in 2012, especially if Japan lowers the age restriction on imported beef.

U.S. corn fundamentals are relatively tight for 2011-12 given the lower yields. However, next year, there is potential for U.S. corn acres to reach 95 million, up from the 2011 seeded area of 91.9 million. Using an average yield, most analysts expect a surge in corn production resulting in a carryout above the five-year average. World corn for 2012 is expected to be a record 890 million mt, up from the 2011 crop of 860 million mt and the six-year average of 774 million mt. World wheat production is also expected to reach a record next year. Barley acres in Western Canada have potential to be up 12 to 15 per cent as well. Feed grain prices are expected to stay strong until April 2012 but then deteriorate on a long-term downward trend lowering the cost-per-pound gain during the latter half of 2012. This is a major factor influencing the price structure of feeder cattle under 400 pounds.

In conclusion, feeder cattle weighing under 400 pounds are selling for record-high prices. The larger cow slaughter in 2011 along with heifer retention in 2012 will sharply reduce feeder cattle supplies in 2012. Lower calf crops and lower feedlot placements will result in a sharp year over year decline in beef production. The U.S. economy is now moving into full-fledged expansion raising beef demand. Feed grain prices will decline in the latter half of 2012 lowering the cost-per-pound gain. Look for these peewee calves to stay abnormally high or even strengthen in upcoming months.

GeraldKlassenanalyzesmarketsinWinnipegandalsomaintainsaninterestinthefamilyfeedlotinsouthernAlberta.Hecanbereachedat [email protected] or204-287-8268.

About the author


Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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