The feeder cattle market was quite volatile throughout the final quarter of 2018. The weaker Canadian dollar enhanced demand from south of the border. At the same time, domestic feedlot operators were contending with rising feed grain prices and uncertain fed cattle prices for the first and second quarters of 2019. April live cattle futures made new contract highs in early January but June and August contracts continue to be at a $9 to $11 discount to the April contract. This price structure for fed cattle caused the spread to narrow between short-keep yearlings and calves. I’ve been somewhat bearish on the feeder market throughout the fall period. Recently, I’ve received many inquiries asking if I had changed my price outlook because the yearling market finished 2018 on a strong tone. Therefore, I thought this would be an opportune time to discuss a few market factors to monitor over the next couple of months.
First, I want to draw attention to the U.S. feeder cattle situation. The USDA reported the number of feeder cattle outside feedlots as of October 1 at 30.142 million head. This is only 0.1 per cent above last year’s number of 30.125 million head. There are ideas that the U.S. calf crop may not be as large as earlier anticipated. Canadian feeder cattle exports to the U.S. are expected to finish 2018 approximately 65 per cent above 2017.
There have been minor changes to U.S. beef production estimates for 2019. Although U.S. feedlot inventories are running above year-ago levels, feeder cattle placements in the lighter-weight categories from September 2018 through November 2018 were sharply below year-ago levels. Therefore, we’ve seen downward revisions in U.S. beef production estimates for the first and second quarters of 2019. More specifically, it appears that U.S. fed cattle supplies could be rather snug during April and in the first couple weeks of May.
I’ve included a table that gives the USDA quarterly production estimates. Notice that 2019 first-quarter production is expected to finish only 100 million pounds above year-ago levels. Beef supplies become extremely burdensome in the second quarter as the USDA is forecasting production at 6.975 billion pounds.
April live cattle futures made a contract high in late December reaching up to $126. In addition to the stronger futures, U.S. packing plants were showing very aggressive basis levels to encourage feedlots to forward contract. Feedlots were able to purchase yearlings and lock in a favourable feeding margin. It very seldom happens that all the stars line up at the same time so this drove up the yearling market in December. Feedlots could see fed cattle prices in the range of $168 to $170 (live basis) for April delivery. For July and August, fed cattle prices have been quoted from $145 to $149. If you’re a cow-calf operator, you can see that the market structure significantly changes for the summer period.
Feed barley and corn markets have been traded in a sideways range throughout December and early January; however, I continue to have a bullish bias to the feed grains complex. Canadian feed barley stocks are expected to drop to historically low levels at the end of the 2018-19 crop year. Statistics Canada estimated 2018 production at 8.4 million mt, up from the 2017 output of 7.9 million mt; however, don’t be misled. Due to the lower carry-in stocks from the previous year, total beginning supplies for 2018-19 are estimated at 9.7 million mt, down from 10.1 million mt last year.
Except for Canada, all major barley-producing countries experienced a year-over-year decline in barley production. This year, we find Canadian feed barley more competitive on the world market. China has been a major buyer of Canadian malt and feed barley. Producers should also be aware that China has imposed an anti-dumping investigation on Australian barley. This could further enhance Canadian exports to China in the latter half of the crop year. The function of the barley market is to encourage the use of alternate feed grains such as U.S. corn. I wouldn’t be surprised to see further upside in the barley market over the winter period.
In conclusion, I’m expecting the feeder cattle market to trend lower during the first quarter of 2019. The year-over-year increase in second- and third-quarter U.S. beef, along with rising feed grain prices, will keep the feeder market under pressure. Feedlots will price feeder cattle accordingly so that they can lock in a profit for the summer and early fall period.