Over the past couple of weeks, I’ve received many inquiries about the price outlook for feeder cattle. Calving season has been in full swing for over a month for many cow-calf operations. Producers are concerned about price behaviour over the next four to six months given the recent meltdown in the financial and commodity markets.
At the time of writing this article, Alberta packers were buying fed cattle on a live basis in the range of $147 to $148, which is down about $18 from the January highs. Break-even pen closeout values are in the range of $159 to $162, so finishing margins are underwater by $11 to $15 based on fed cattle prices. Yearling prices have mirrored the drop in the fed cattle market, as the August live cattle futures are now trading near contract lows. Mid-weight feeder cattle have experienced a marginal decline of $5 to $8 from the January highs; however, it appears that the calf prices have totally divorced from the fed cattle market. Demand has been exceptionally strong as of late.
I thought this would be a good time to discuss the longer-term fundamentals as cow-calf producers will be more concerned about the price outlook for the fall period. Statistics Canada and the USDA have released their January 1 semi-annual cattle inventory reports. The data points to a tighter fundamental structure for calves and beef for the fall and winter period.
It’s important to realize that the price of feeder cattle is largely based on the fed cattle price when the animal is finished and the price of feedgrains. Feedlot finishing margins in the short term also influence the feeder market but not to the extent one would think. Usually, we need to see about two rounds of feeding with significant equity erosion before the calf market succumbs to the margin structure in finishing feedlots. Otherwise, I’ll go out on a limb and state that, usually, the supply and demand for feeder cattle is totally different than the nearby supply and demand of fed cattle. Hence, it’s not uncommon for calf prices to divorce from the fed cattle market.
The USDA estimated the 2019 calf crop at 36.060 million head. That’s down approximately 250,000 head from the 2018 output of 36.313 million head. This is the first year of contraction since 2015 in the U.S. cattle herd. Without going into detail, 374,000 fewer beef cows had calved as of January 1, 2020, than January 1, 2019. The main point is that the year-over-year decline in the calf crop was in beef, not dairy.
Second, beef heifer retention numbers were down 110,00 head from last year, so we’ll likely see another year-over-year decline in the calf crop for 2020. I’m projecting the 2020 calf crop to finish at 35.7 million head, down 360,000 head from 2019.
According to Statistics Canada, the 2019 Canadian calf crop came in at 4.251 million head. That’s down 46,400 head from the 2018 output of 4.297 million head and down 108,000 head from the 2017 calf crop of 4.358 million head. The Canadian herd has been contracting for two years. As of January 1 this year, 3.561 million head of beef cows had calved, down 95,000 head from January 1, 2019; 515,000 head of beef heifers were retained, down 34,000 head from last year. It now looks like the 2020 calf crop could dip to 4.150 million head, down 100,000 head from 2019.
Given the year-over-year decline in calf crops and the U.S. slaughter schedule to date, the fed cattle market will experience a significant fundamental change over the summer. U.S. second-quarter beef production is expected to experience a sharp year-over-year increase; however, third- and fourth-quarter production will experience a year-over-year decrease. More importantly, if a normal feedlot placement schedule materializes this fall, we could see significant year-over-year decreases in the first quarter of 2021. This is going to keep prices for lighter calves and grassers well-supported. Yearling prices this fall have potential to trade back up to 52-week highs given the positive outlook for fed cattle values in the first quarter of 2021.
In the short term, cow-calf producers need to shut off the news and turn off the screens. On the flip side, if cow-calf producers are looking to expand, now is the time to pick up a few more bred cows or bred heifers. You want to do the opposite of the crowd to be successful in the long term.