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A few observations regarding the feeder cattle market

Market Talk with Jerry Klassen

Throughout the fall period, western Canadian calves were trading $10 to $15 below year-ago levels. Yearlings were quite firm earlier in September, reaching up to 52-week highs. After peaking in the first half of October, the yearling market has been slowly trending lower.

This is counter-seasonal to price patterns we’ve seen in past years. Usually, yearlings remain firm until December and then start to soften in January. Over the past couple of weeks, I’ve received many inquiries from cattle producers asking about the expected market direction for calves and yearlings. Cattle producers always have to have an idea of the market influences six to 12 months forward. Therefore, I thought this would be a good time to go over a few factors that will influence the feeder market during the first quarter of 2020.

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The feed grain situation is having a stronger effect on the feeder market compared to last year. Remember, during the 2018-19 crop year, southern Alberta feedlots imported a large amount of corn due to the lower barley crop and historically tight feed grain fundamentals in Western Canada.

This year, the feed grain situation was exactly the opposite earlier in the fall. Lethbridge-area feedlots experienced barley prices sub $210/mt delivered for a brief period in September and early October; however, during the last week of November feed barley was in the range of $235/mt to $240/mt in Lethbridge. In any case, this is still sharply lower than imported U.S. corn prices. The delayed harvest south of the border and lower-than-expected corn yields have caused U.S. corn futures to remain firm. Basis levels in the upper Midwest are sharply above year-ago levels. It’s also important to note that the Ontario corn crop was only about 50 per cent harvested at the end of November.

The economics for cattle feeding in Western Canada are considerably better than last year. Demand for feeder cattle from U.S. and Ontario feedlots is lower than last year. For the week ending November 15, western Canadian feeder cattle exports to the U.S. were under 1,000 head, which is very low for this time of year. Feeder cattle exports are down from last year, which has caused more supplies to be sold in the domestic market.

Second, adverse weather and lower feeder cattle prices caused U.S. producers to hold back on sales earlier in the fall. During June 2019 through August 2019, U.S. feedlot placements under 700 pounds were sharply below year-ago levels. Remember, the feeder cattle market is the fed cattle market five months forward. We’ve recently seen February and April live cattle futures trade near contract highs due to the uncertainty in first-quarter beef production. The USDA is still projecting 2020 first-quarter beef production to finish above last year; however, many analysts are forecasting a sharp year-over-year decrease in beef supplies during the January through March period.

Feeding margins in Western Canada have hovered in red ink throughout the summer and fall period. However, it now looks like feeding margins will be in positive territory during the first quarter of 2020. Notice the June live cattle 2020 futures were trading at a $9 discount to the April contract. The fed cattle market goes from one extreme to another. Beef supplies will be very tight in the first quarter but extremely burdensome in the summer of 2020.

The U.S. cow slaughter reflects that we could see a minor year-over-year decrease in the U.S. calf crop. I want to draw attention to the November 2020 feeder cattle futures, which have been trading at a $9 premium to the January 2020 contract. The USDA estimated the 2019 calf crop at 36.3 million head, down 100,000 head from the 2018 calf crop. There are thoughts that the calf crop may be somewhat lower than USDA estimates given the beef cow slaughter. Recently, featherlight calves under 500 pounds have been very strong. It appears that yearling supplies could be rather snug next fall.

Strong domestic corn prices and the ongoing U.S.-China trade war will result in a year-over-year increase in U.S. corn acres. Early estimates suggest Canadian 2020 barley acres could also be up five per cent to eight per cent over 2019. Barring adverse weather, the feed grains complex is factoring in a larger Canadian barley crop and a larger U.S. corn crop. During the fall of 2020, the feeder market will be contending with a year-over-year decrease in supplies while feed grain prices are expected to drop to five-year lows. Therefore, feeder cattle prices are expected to be quite strong during the fall of 2020.

In conclusion, feeding economics for the winter of 2019-20 are more favourable in Western Canada than in the U.S. Canadian feeder cattle exports to the U.S. are down from last year. However, the improving feeding margin structure will limit the downside and has potential to cause the calf market to strengthen. Beef production will be rather burdensome in the summer of 2020.

On the flip side, the yearling market looks to be very strong during the fall of 2020. The feeder market has potential to be very volatile because the main factors driving prices will change significantly from quarter to quarter.

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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