I’ve received many inquiries with regard to the market outlook for feeder cattle. Western Canadian yearling and calf prices have been trading near 52-week highs and cow-calf operators are wondering if prices will continue to percolate higher during the fall period. The feeder market is a pure competitive market; therefore, feedlots usually bid up the price of replacement cattle until there is minimal, if any, margin when selling the animal at slaughter. Therefore, cow-calf producers and backgrounding operators need to have a good handle on the feed grain and fed cattle markets. Recently, we’ve seen the Alberta feed barley prices divorce from the corn market. Canadian barley stocks are expected to be historically tight at the end of the 2018-19 crop year; however, U.S. farmers will harvest a corn crop with record yields. Canadian feeder cattle exports to the U.S. are running sharply above year-ago levels and this will likely continue throughout the fall. Fed cattle prices appear to be ratcheting higher after making seasonal lows in September. The April live cattle futures are reflecting stronger values for the February and March period.
In the previous article, we discussed the fundamentals for Canadian barley. At the time of writing this article, feed barley in the Lethbridge area was trading in the range of $250/mt to $260/mt delivered, which is about $50/mt higher than last fall. Adverse weather has also delayed harvest progress so the market is not experiencing the typical seasonal selling pressure. In the U.S., corn prices are actually trading below year-ago levels. Despite the weaker Canadian dollar, imports of U.S. corn into southern Alberta feedlots will experience a sharp year-over-year increase.
Given the barley premium over corn, it appears that U.S. feedlots are experiencing a competitive advantage when it comes to the cost per pound gain. Canadian feeder cattle exports to the U.S. for the week ending September 1 were 147,675 head, up 56 per cent over last year. It’s important to realize the Canadian dollar is trading at US$0.77 whereas during September 2017, the Canadian dollar was averaging US$0.81. Canadian feedlots are contending with higher input costs. Also, the weaker Canadian dollar has raised the price of feeder cattle due to the year-over-year increase in exports.
The USDA estimated their January through June calf crop at 26.6 million, up 600,000 head from the first half of 2017. While the U.S. cattle herd continues to expand, the Canadian calf crop is expected to be similar to year-ago levels.
The live cattle futures are basically the feeder cattle futures five months forward. I’ve attached a chart (below) showing the November feeder cattle futures minus the April live cattle contract. Notice this spread has widened over the past month as the corn market has come under pressure.
U.S. corn prices are expected to remain under pressure through the harvest period but then the focus will turn to world demand. U.S. exports are expected to exceed year-ago levels due to the year-over-year decrease in Argentine and Brazilian production. In the previous issue, I mentioned that world corn stocks would finish sharply below the 10-year average for the 2018-19 crop year. Therefore, the corn market will be very sensitive to South American crop conditions. At this stage, it looks like South American farmers are receiving an abnormal price signal for cropping decisions. The high soybean prices will likely cause a year-over-year decline in corn acreage. I’m expecting the corn market to incorporate a risk premium over the winter until the South American crop is more certain. This will cause U.S. corn prices to increase. The feeder cattle premium over live cattle will erode.
In conclusion, I’m advising cow-calf producers not to background their calves over the winter but rather sell during the fall period. Feeder cattle prices are relatively strong due to the weaker Canadian dollar and lower U.S. corn prices. All factors have aligned so that the feeder market is likely in the process of making seasonal highs. After the U.S. corn harvest, the corn market is expected to strengthen which will weigh on the feeder cattle market. The June live cattle futures is trading at a $7 discount to the April contract. Feedlots will buy feeder cattle so that they can market the animal between February and April. The lower June live cattle futures along with the potential for higher corn prices over the winter will weigh on the feeder cattle market from December through April.