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Understanding cattle markets

When beef supplies are growing, the futures market anticipates that increased supply and deferred futures trade at discounts to nearby months.

Whenever I provide a market outlook for a producer group or convention related to beef production, I always start off by asking how many producers subscribe to market information. Inevitably, maybe three or four hands go up. The market outlook is always the last topic of discussion at the convention and needless to say, given a back seat to other areas of new information regarding production practices or policy implications.

We’ve seen historically large changes in the markets over the past couple of years which have caused significant changes in the balance sheet of most cattle producers; however, this hasn’t changed the attitude towards market analysis. Instead of trying to understand the fundamentals of the market, most people involved look for some factor to blame for the downward price action. Instead of taking responsibility for their lack of knowledge on the market, absurd factors are brought into the forefront. For example, I read an article about speculative-type trading on the cattle futures. Interesting to note that no one complained about speculative activity when the market was rallying to all-time highs.

Last fall when feeder cattle prices in Western Canada were trading near record highs, I received many inquiries from backgrounding operators and finishing feedlots about the market structure. For example, one producer using the price insurance program stated it would cost $80 per head to lock in a $200-per-head loss. What should I do? The answer is quite logical. Despite my comments about stagnating demand and growing beef supplies, not one producer took my advice to hold off from making purchases. I came up with the three most common responses from producers.

1. My cattle buyer says I have to start buying now. (This should be a red flag in itself!)

2. Everyone else is buying so I also have to buy feeder cattle now. (If everyone jumps off a cliff, are you following?)

3. I’ve been buying calves in the fall for 20 years and I’m not changing my program. (Are you a robot?)

My ending comment was, “why are you calling me if you don’t want to follow the advice.” This may sound a bit harsh but I’m not a counselling comfort call centre.

The cattle cycle moves through expansion and contraction phases. These decisions by cow-calf producers to expand or liquidate the cow herd are a delayed response to changes in beef demand. Beef demand is directly related to the economic situation in North America due to consumer spending. Beef is not like chicken or pork because a large portion of the carcass is consumed by people making average to above-average incomes.

For example, in January of 2010, I was asked to speak at a producer meeting where all types of ideas were being discussed to increase calf prices, including supply management. You can imagine the desperation. I couldn’t attend the meeting, but I wrote the group a paper stating that the economy was turning around and by January of 2011, the group will forget it ever had this meeting. Unemployment rates had peaked and were starting to improve while consumer confidence was coming off the lows. The beef herd would probably continue to contract. Growing economy and contracting beef herd, perfect conditions for a rising market.

In June of 2015, I spoke at the Canadian Livestock Auctioneers Association Annual Convention in Winnipeg. At that time I showed data that stated prices have peaked or are near the highs. The timing was impeccable because that was the exact high for fed cattle prices. Unemployment rates were under the long-term average; consumer confidence was at a high and beef production was starting to increase over year-ago levels. Short-term beef demand is rather inelastic, a small change in supply can create a large change in price.

In Canada we have supply management for poultry but in the U.S., poultry is quickest to respond to changes in the market. Pork is second while beef is last. It takes a long time for beef production to expand or contract. For example, during expansion, we first see the cow slaughter drop. We then see heifer retention followed by increased calf numbers. It takes five to 12 months for the calves to come onto the market and then a certain amount of time for feeding.

When the beef complex is expanding and supplies are growing, the futures market anticipates the increased beef supplies. The deferred futures trade at discount to the nearby months. This makes it almost impossible to hedge feeder or fat cattle at profitable levels. The opposite occurs when beef supplies are contracting. The futures market often incorporates a risk premium due to the uncertainty in beef production.

In conclusion, market forecasts may not always be correct but at least producers are aware of the risks. Producers should know that markets work, moving up and down according to supply-and-demand factors.

About the author


Jerry Klassen is president and founder of Resilient Capital, specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204-504-8339 or via his website at

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