I often look at past articles to see how markets have developed compared to my thought process at the time. In the October 2017 issue, I discussed how barley prices in Western Canada had potential to strengthen over the winter. During September, Lethbridge barley was trading in the range of $190 to $195 and I suggested that we could see a $30 to $40 rally in the barley market. At the end of March, barley was readily trading in the range of $243/mt to $248/mt delivered. I was correct in my thinking, but failed to take this one step further and discuss how rising feed grain prices would pressure feeder cattle prices. Western Canadian feeder cattle prices have been grinding lower since the start of 2018 and there could be further downside. I’ve received many inquiries from producers about the feed grain price outlook that I discussed in the March 2018 issue. Therefore, I will continue the discussion with updated price projections now USDA has released their seeding intentions report. More importantly, I’ll provide analysis how this will influence the price structure for feeder cattle.
The feed grain complex has been digesting drought-like conditions in Argentina along with delayed seeding progress for the second crop corn in Brazil’s Safrinha region. Argentina’s corn production is expected to finish in the range of 30 to 31 million mt, which is down from the February USDA estimate of 39 million mt and down from year-ago production of 41 million mt. The year-over-year decline in Argentinean corn production has curbed their potential export program. Therefore, we’ve seen more export business switched over to U.S. origin, which has tightened the fundamental structure for the 2017-18 crop year. The USDA lowered the U.S. corn carry-out by 225 million bushels on the March report and we could see further decreases because of greater offshore movement.
U.S. farmers intend to plant 88 million acres of corn in 2018, down from last year’s seeded area of 90.1 million. This is a significant change to the fundamentals for 2018-19. Using an average yield of 176 bushels per acre (which would be the second highest on record after 176.6 bushels per acre last year), the production has potential to finish at 360 million mt, down from the 2017 crop of 371 million mt. Corn demand is relatively inelastic because of the domestic feed usage and ethanol component. A small change in supply results in a larger change in price. If trend yields materialize, the 2018-19 carry-out will drop to 39 million mt, down from the 2017-18 ending stocks of 54 million mt. The five-year average carry-out is also around 39 million mt. If corn yields come in two or three bushels per acre below trend, this corn market could easily trade in the range of $6 to $7 per bushel.
The question is how will corn price action affect the Canadian barley market. Keep in mind Canadian barley stocks will drop to historically low levels at the end of the 2017-18 crop year. The barley market in Alberta and Saskatchewan was functioning to ration demand through higher prices. Barley prices needed to trade high enough to encourage imports of U.S. corn. The 2017 wheat and durum crops were high quality with little volume for feed usage. Higher barley prices usually encourage farmers to increase acreage but private trade estimates don’t suggest a major shift into barley production.
Barley prices could easily rally an additional $20 to as much as $40 per mt, especially if adverse growing conditions materialize.
During September and October, feedlots were factoring in a cost per pound gain of $0.98 (all costs including feed and yardage). Given the price outlook for corn and barley, feedlots are now factoring in a cost of $1.30 which is a 33 per cent increase. If a feedlot is going to put on 500 pounds per animal, in the fall of 2017 the cost was about $490; in April of 2018, the feedlot will be factoring in a cost of $650. This additional cost has to come off the feeder cattle price.
I’ve attached a chart of the May feeder cattle minus the October live cattle. Notice the feeder cattle premium over the live cattle reached a high of $40/cwt back in November. This coincides with the seasonal low in corn prices. We’re now seeing this spread continue to narrow as the corn prices strengthen. In the fall period, we could see the feeder cattle and the live cattle contracts trade at the same price.