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MARKET TALK – for Feb. 14, 2011

Feeder cattle prices have reached historical highs and I’ve had many inquiries from producers regarding the potential upside. The old law of physics stating that an “object in motion tends to stay in motion until acted upon by an opposing force” appears to be the theme going forward. Therefore, we have to look at the potential influences that could temper or slow the upward trend. In this article, I’ll provide an overview of historical price patterns along with ideas about when heifer retention will occur on a large scale for herd expansion.

Attached is a chart of monthly live cattle futures from 1964 to January of 2011. In previous articles, I’ve mentioned that when the U.S. business cycle moves through an expansionary phase, cattle prices tend to move into a new fundamental trading range. The first major expansion was from November 1970 to November of 1973 where live cattle prices went from $26 per cwt to $60 per cwt. From March of 1975 to January of 1980, prices went from low of $34 to a high of $80 per cwt. The next major business expansion occurred from November of 1982 to July of 1990 and the price range was $50 to a high of $80 per cwt. Finally, from November of 2001 to December of 2007 prices dipped to

$59 per cwt and then topped out at $104. Price increases are largely due to a surge in beef demand as consumer’s disposable income increases and other inflationary pressures. In this last recovery, we’ve also seen exports improve enhancing the price structure as April futures are now topping $112 per cwt and there is no signal this trend has come to an end.

You can see on the chart it is not uncommon to see cattle prices increase by 25 per cent to 50 per cent from the previous historical high. Volatility also increases because it takes time for wholesale and retail prices to increase as well. This puts tremendous strain on retailers and packers while the cowcalf producer finally reaps some of the rewards of sticking it out through the recession.

Another factor to consider is the cattle cycle. I didn’t show this detail on the chart but looking back at history, the U.S. cow-calf producer needs one full year of historically high prices before heifer retention begins. U.S. feeder cattle prices actually made highs back in March of 2010 so I wouldn’t be surprised to see cowcalf producers hold back heifers this spring. I had many calls from cattle producers stating that young guys are leaving the ranches and with $13 per bushel canola, young farmers want winters off and air-conditioned cabs. Expansion comes from the long-term large producers and new entrants that realize this is the time to be in the cattle business.

The question remains how high can these feeder prices go? In central Alberta, 700-pound feeder steers were selling for $125 per cwt before Christmas. To see these cattle reach $150 over the next 12 months wouldn’t surprise me. However, it is going to be a volatile ride. As you can see on the chart there are extreme price swings when a market makes fresh highs. Markets move from extreme lows to extreme highs and we’ve just experienced a very deep recession.

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

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When the U.S. business cycle moves through an expansionary phase, cattle prices tend to move into a new fundamental trading range

About the author

Columnist

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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