It’s that time of year when I receive many inquiries from cow-calf producers and feedlot operators regarding the price outlook for feeder cattle. Throughout March, yearling prices were under pressure while calves and cattle fit for grass were rather firm. The feeder cattle market appears to be sending mixed signals. Feedlot margins have been rather favourable so far in 2018; however, from May through August, margins appear to be deep in negative territory based on the current live cattle futures. The cattle market appears to be sending mixed signals. Therefore, in this issue I’ll discuss a few factors driving the feeder market in the short term and then provide an idea of the price structure for the fall period.
At the time of writing this article, steers averaging 1,000 pounds were readily trading from $163 to $165 across the prairies while 950-pounders were quoted from $168 to $172. The market has dropped about $10 to $15 from earlier in February. This has occurred for two main reasons. First, I mentioned in the previous articles that barley stocks at the end of the 2017-18 crop year will drop to historically low levels. We’ve also seen imported corn prices percolate higher due to the drought in Argentina, the weaker Canadian dollar, along with the tightening of the U.S. corn fundamental structure. Export basis levels out of the U.S. are at historically high levels despite the rising corn futures. It’s not only the rising feed grain prices; grain merchants have struggled to deliver on time due to adverse weather and rail delays.
Second, the USDA made some serious changes on their March WASDE report. First-quarter beef production was decreased by 90 million pounds from their February estimate. Beef production during March is coming in below earlier projections which is keeping the nearby basis level rather strong. Looking toward the second quarter, the USDA increased production by 50 million pounds from their February estimate. It now looks like second-quarter beef production has potential to experience a year-over-year increase of 800 million pounds. This has caused the June and August live cattle futures to trade lower in an effort to encourage demand.
During the fall of 2017, feeder cattle prices were quite strong due to the healthy margin structure throughout the previous year. Feedlots had higher income levels which caused the feeder market to trade abnormally high. It now looks like the calves bought last fall will be under water when marketed as fed cattle in the summer. Therefore, feedlots are buying feeder cattle based on the current value of the August live cattle futures.
The lighter calves are contending with a totally different market fundamental structure. The official data from the USDA shows that feeder cattle outside feedlots as of January 1, 2018, were 26.105 million head, down 2.27 per cent from 26.552 million head last year. Despite the year-over-year increase in the calf crops the past two years, available feeder cattle supplies for January through June will be down from last year. The drier conditions in the U.S. Southern Plains has resulted in feeder cattle being placed sooner than normal. The USDA January cattle-on-feed report also showed a year-over year increase in placements; however, at some point over the next couple of months, placements could be down from last year. The September and November feeder cattle futures have been trading at a $6 premium to the nearby May contract. Yearling numbers in August and September have potential to be down from year-ago levels; therefore, calves and grassers this spring will remain rather strong. Don’t expect much price slippage in the lighter weight categories.
In Canada, the 2017 calf crop was estimated at 4.411 million head, up 155,000 head from the 2016 crop. Placements in Alberta and Saskatchewan from August through December 2017 were 1.048 million head, up 128,000 head from the same time frame in 2016. One can make the argument that Canada is in a similar situation as the U.S. Despite the year-over-year increase in the calf crop, available yearling supplies will be down from last year during the fall period.
I want to remind producers that sometimes the futures market leads the cash market and other times it is the opposite. The futures market exhibits behaviour known as the “constellation of prices.” This is when the deferred futures trade in a similar fashion as the nearby contract or also referred to when the feeder market behaves like the nearby live cattle contract. This can sometimes be misleading for cow-calf producers when they are trying to buy price insurance on their calves because the market is not behaving as per the fundamentals when the feeder cattle will be sold.