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MARKET TALK – for Nov. 14, 2011

I ve received many inquiries over the past couple weeks in regards to the fed cattle outlook for the first and second quarters of 2012. Feeder cattle prices have reached historical highs and barley prices appear to be percolating higher. Therefore, feedlot operators have a fair amount of risk moving forward. It is also important that cow-calf producers have a longer-term view of the fed cattle market. The two main factors influencing the price of feeder cattle are the cost per pound of gain and the expected fed cattle price at slaughter. The cattle complex is a pure competitive market so feedlots usually bid up the price of feeders to the level where feeding margins are minimal. In this issue, I m going to discuss at the fed cattle fundamentals for the winter and spring timeframe.

The drought in the U.S. Southern Plains caused larger portions of feeder cattle to be placed sooner than normal. U.S. feedlot placements during July were approximately 400,000 head larger than July of 2010 while August placements came in very similar to year-ago levels. Total U.S. year-to-date placements are above year-ago levels but should drop below 2010 in the final quarter of 2011. This will result in lower on-feed numbers in the first quarter of 2011 and market ready supplies should tighten. Another factor to consider is that average U.S. carcass weights have been increasing but not at the normal pace for this time of year. High corn and alternate feed grain costs have kept feedlots relatively current with production, especially as the fed cattle prices rallied in early October.

The USDA is projecting that fourth-quarter beef production will drop under 2010 by 150 million pounds. During the first quarter of 2012, we should see beef production drop by nearly 261 million pounds or 4.1 per cent in comparison to the first quarter of 2011. Notice a similar year-over-year decrease of nearly 3.5 per cent in the second quarter. Total 2012 beef production could be down 1.3 billion pounds in comparison to 2011.

Looking at the demand equation, there are many more factors to consider. First U.S. domestic consumption is the larger influence on the price structure and changes relative to consumer spending. A one per cent increase in consumer spending equates to a one per cent increase in beef demanded. Second-quarter spending was rather dismal coming in at a meagre 0.7 per cent over the first quarter however, recent data suggests the economy is showing signs of momentum. Consumer spending is 70 per cent of U.S. GDP and projections now have third-quarter spending at 1.3 per cent and jumping to about 2.1 per cent in the final quarter of 2011. Therefore, analysts see an increasing domestic demand scenario going into 2012.

There is a very strong seasonal trend for restaurant and grocery spending to increase from January through May.

U.S. beef exports are projected to reach 2.735 billion pounds during 2011. This strong movement is expected to continue reaching 2.755 billion pounds in 2012. However, U.S. beef imports will be down due to the historically low cattle herd in Canada and lower imports from other major producers such as Australia and South America. The net change of exports minus imports is about 700 million pounds for 2012 evenly distributed throughout each quarter. This will further tighten beef supplies in the first half of 2012.

At the time of writing this article, April live cattle futures were hovering at contract highs near $128. The market appears to be incorporating a risk premium due to the uncertainty in production. The U.S. economy was bordering on the brink of recession in the second and third quarters of 2011 but it appears momentum is building for the economic environment to improve in the first half of 2012. Looking at past history, the cattle market usually makes fresh highs when the U.S. business cycle is moving into a full fledged expansion phase. June live cattle futures are only a $2 discount to the April contract. Usually, the fed cattle market trends sharply lower from April through summer but 2012 will not be as sharp of a decline due to the lower beef supplies and higher consumer spending.

Fed cattle prices are expected to percolate higher from October through April and then stabilize. The cash market usually leads the futures market higher when supplies tighten; therefore, basis levels in Canada and the U.S. are expected to strengthen in late winter and early spring of 2012.

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

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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