I’ve received many calls with regard to the outlook for the feeder cattle market for the fall and winter period. Many cattle producers are asking if they should be backgrounding their calves over the winter while others are looking to sell yearlings over the next month. There are quite a few factors that will influence the feeder market moving forward so I thought this would be an opportune time to discuss the market outlook.
The USDA released their semi-annual cattle inventory report on July 21 and the 2017 calf crop was estimated at 36.5 million head, up 3.5 per cent from the 2016 calf crop of 35.0 million head. The last time the U.S. calf crop was this large was back in 2007 when it reached 36.8 million head. We haven’t seen a sharp increase in the cow slaughter so the U.S. cattle herd continues to expand at a rapid pace. The 2017 Canadian calf crop is expected to come in at 4.4 million head, up about 50,000 head from 2016. Given the sharp year-over-year increase in the U.S. calf crop, I’m expecting Canadian feeder cattle exports to the U.S. will drop to a trickle during the fall and winter. Strength in the Canadian dollar will also temper any opportunities to sell feeder cattle south of the border.
The barley and feed grain outlook has changed from the previous issue. Instead of being “bullish” on the market, I’ve changed my perspective to a rather “price neutral” outlook. While barley supplies are expected to be historically tight during the 2017-18 crop year, U.S. corn production will be larger than earlier anticipated. This will cause U.S. corn and dried distillers grains to trade into southern Alberta. Barley prices in southern Alberta will trade at a premium to imported U.S. corn values. However, with corn prices under pressure during harvest, barley prices will trade in a relatively sideways pattern. After the harvest period, barley prices will likely experience a moderate rally of $15/mt to $20/mt but nothing too earth-shattering that will break the back of the feedlot. Many western Canadian feedlots will switch over to U.S. corn.
The final factor to consider for feeder cattle is the current margin structure and the margin structure in the deferred months, which is dependent on the price of fed cattle. Western Canadian feedlots have gone through an unprecedented profitable period since March and cattle moving out of feedyards in mid-August are still bringing back around $100/head. The equity buildup over the past eight months will be supportive for yearlings in September and October. I think we’ll see some strong prices for yearlings this fall. It would not surprise me if medium-frame steers averaging 850 pounds traded around $2.10/pound this fall. We saw very similar feedlot behaviour back in 2015 after feedlots had a very profitable first half of the year. The fall period’s strong yearling market only started to really come under pressure in December once feedlots experienced about four to six months of negative margins.
Above is the U.S. quarterly beef supply projections. If 850-pound yearlings reach up to a range of $2.05/pound to $2.10/pound, the break-even price for the fed cattle in February and March is around $1.60. Interesting to note that during February 2016, the average fed cattle price in Alberta was $1.60. Notice that 2018 first-quarter beef production is expected to come in at very similar levels to 2017. The only difference is that second-quarter beef production will be sharply above 2017. Prices adjust for a relatively tight supply situation in February and early March of 2018 and then start to grind lower given the burdensome supplies in the second and third quarters.
In conclusion, cow-calf producers with yearlings will want to sell in September. Feedlot margins will be quite narrow in November and December which may put the feeder market on the defensive. Producers with calves have two options. The first being to sell in fall because I believe the calf market will trade relatively sideways. Second, these producers may want to background their calves and sell in February 2018. In any case, cow-calf producers do not want to be holding calves or yearlings after February 2018. Make sure you’ve liquidated all your supplies by then because once the market anticipates the burdensome supply in the second quarter, both fed and feeder cattle prices will tumble. I wouldn’t be surprised if the USDA raised third- and fourth-quarter beef production estimates on subsequent reports. A larger calf crop will cause larger feedlot placements, increased feedlot marketings and larger beef production. If corn prices remain flat, carcass weights will increase. The market will function to encourage contraction in the third and fourth quarters of 2018 through lower prices for fed and feeder cattle.