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Winter forecast for feeding margins

Market Talk with Jerry Klassen

Feedlots in Canada and the U.S. experienced a very profitable feeding margin structure from January through August. During the first week of May, when the fed cattle market reached $197, margins actually edged over $700 per head in some cases which was a record in my career of analyzing profitability. However, margins moved into negative territory in September. Feeder cattle that were purchased in May and June are now underwater by $250 to $300 per head. In late September, the Alberta fed cattle market was trading from $132 to $135 and the break-even pen closeout price was around $155. Despite the negative margins, feeder cattle prices have percolated higher throughout the late summer and fall period. In past years, feedlots needed to experience four to six months of negative margins before bids for feeder cattle started to decline. I’ve received many inquiries with regard to the forecast for feeding margins over the winter. Cow-calf producers are asking if they should be selling their calves now or putting on 300 to 400 pounds over the winter to sell as yearlings next March. Therefore, I thought this would be an opportune time to discuss the feeding margin structure through the winter period.

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Feed barley prices in southern Alberta were quoted in the range of $200/MT to $205/MT. Since the previous issue, there has been one major change in the feed barley market. Approximately 65 per cent of the barley seeded in Western Canada is a malt variety. This year the crop quality was excellent and I’m now estimating that malt barley production could reach as high as four million MT out of 7.5 million MT total barley crop. Farmers with malt barley will wait and hope for malt barley prices. In the previous issue I mentioned that the barley market needed to function to ration demand by encouraging the use of alternate feed grains. We will likely see low-protein milling wheat move into feed channels, and the feed grains market in Canada will be high enough over the winter to encourage imports of U.S. corn. I still feel there is $20/MT to $30/MT of potential upside in the barley market.

This will add about $40 to input costs on a yearling over the winter.

I feel the fed cattle market is in the process of making a seasonal low. The monthly U.S. slaughter will likely peak in October. In November and December, I’m expecting the slaughter to experience marginal month over month declines. Although beef production will still be above year-ago levels, the main point is that beef production is not increasing. The market is not getting “more bearish” but, rather, stabilizing.

Those of you who have been following my comments for a while know that beef demand experiences a seasonal low in September and October. In late October, restaurant traffic tends to increase. Demand is further enhanced in early November when beef packers start buying for the U.S. Thanksgiving holiday. In December, consumer spending puts the economy into overdrive and this year, it could be more significant as the economy is running full steam. Unemployment levels are at historical lows, consumer confidence is near historical highs and equity markets have been very strong. It is interesting to note that approximately 12 per cent of the U.S. population was affected by the recent hurricanes but this didn’t seem to temper beef demand as much as expected. The main point being is the economy appears to be very resilient when it is on full throttle.

Earlier in summer, the October to December live cattle futures were trading at even money or relatively the same price. At the time of writing this article, the December contract was trading at a $6 premium to the October contract. This confirms the idea that the October period will probably be the lowest fed cattle prices of the year.

Feedlot operators have currently bid up the price of yearlings so that there is very little margin in the first quarter of 2018 based on the current April live cattle futures. Feeding margins will likely remain in negative territory until early January. In February and March, feeding margins are expected to move into positive territory by $50 to $100 per head. During the second quarter of 2018, I’m expecting feeding margins to come under pressure. Don’t expect the fed and feeder cattle markets to rally in April and May of 2018 as they did in 2017. This was a unique situation that will not occur two years in a row.

In conclusion, I feel the cow-calf producers have potential to add value to their calves by backgrounding them over the winter and selling them in the March time frame. I’m expecting the yearling market to remain relatively flat over the winter. The current calf yearling spread favours holding calves and selling them in the late winter, early spring period.

About the author

Columnist

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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