It’s that time of year when I receive many calls from cow-calf producers and backgrounding operators inquiring about the feeder cattle market outlook for the fall and winter. Yearling prices have been quite strong throughout the summer and the deferred live cattle futures are reflecting slightly higher prices in September and October. Prices for calves have been relatively flat throughout the summer. Therefore, I thought this would be a good time to discuss factors that will influence the feeder market moving forward.
First, the USDA estimated the January 1 through June 30 calf crop at 26.6 million head, which was up from 26.0 million head for the same time frame of 2017. In the latter half of 2018, the U.S. calf crop is expected to come in at 9.9 million head, up from 9.808 million calves born from July through December of 2017. Recently, we’ve seen drier conditions in parts of the U.S. southern plains cause feeder cattle to come on the market sooner than normal. It is important to realize that the number of feeder cattle outside feedlots as of July 1, 2018 was 37,100 head, up marginally from 37,000 head on July 1, 2017. Given the increase in the calf crop, one would think the feeders outside feedlots would be higher but this is not the case.
In Canada, I’m estimating the 2018 calf crop at 4.450 million head, up from the 2017 output of 4.411 million head. Calves coming on the market during the fall period in Western Canada will be similar to year-ago levels. It’s also important to note that year-to-date Canadian feeder cattle exports to the U.S. from January 1 through July 21 were 138,092 head, up 66 per cent from 83,009 head for the same time during 2017. We’ve seen very strong demand so far this year so actual feeder cattle supplies in Western Canada may be down marginally this fall, despite the year-over-year increase in the calf crop. Taking into account both the U.S. and Canadian situations, the number of feeder cattle outside feedlots as of July 1 was very similar to year-ago levels.
In my previous article, I discussed the corn and barley market situation. There have been a few significant changes over the past month. Much of Western Canada received less than 40 per cent of normal precipitation over the past 30 days at the time of writing this article while temperatures have been above average. The expected average barley yield has been revised lower. Barley production will likely finish around 8.9 million mt, up from 2017 crop of 7.9 million mt. Canadian barley stocks were historically at the end of the 2017-18 crop year and despite the year-over-year increase in production, the fundamentals will remain relatively snug for 2018-19 because of the stronger demand. Russia, Ukraine, Australia and the European Union are all experiencing a year-over-year decline in production; therefore, Canadian exports have the potential to rise sharply above 2017-18 levels. The bulk of the business will go to China. In any case, Canadian barley stocks will remain historically tight for 2018-19.
The corn market is also quite bullish longer term. U.S. corn production is expected to finish around 371 million mt, which is similar to the 2017 crop size. However, it is important to realize that the 2018-19 world corn ending stocks will drop to 155 million mt, which is down from the 2017-18 carry-out of 193 million mt and down from the 10-year average of 164 million mt. U.S. ending stocks will also dip and experience a significant year-over-year decline due to larger exports. It would not surprise me if corn and barley prices rallied $30/mt to $40/mt between now and next spring.
Another factor to consider is the fact that feedlot margins have been hovering around break-even over the past couple of months. We haven’t seen a significant buildup in equity compared to last year but the buying power will be very similar to the fall of 2017. April live cattle futures reached up to the US$120 area. It appears that 2019 first-quarter beef production will be similar the first quarter of 2018; therefore, fed cattle prices should also trade at similar levels.
In conclusion, cow-calf producers should market their calves in the fall. This will not be the year for backgrounding because feed grain prices could skyrocket next spring. If cow-calf producers do choose to background their cattle, they must make sure they buy price insurance for the spring period. Similarly backgrounding operators should also buy price insurance as soon as they buy the feeders. The world is now in a situation where a crop problem in South America would cause corn prices to move up to historical highs. Producers have to think about the what-if scenarios. If feedlot margins move into negative territory due to rising feed grain costs over the winter, the backgrounding operator could really take a bath next spring.