In my previous column, I stated that feeder cattle prices were in the process of making seasonal highs due to the lower feed grain prices and weaker Canadian dollar. At that time, I mentioned that producers should buy price insurance on their calves or feeder cattle. Since writing that article, the feed grain fundamentals have tightened while the Canadian dollar has experienced significant volatility. Feeder cattle prices were percolating higher but the upward trend has come to a halt. Looking forward, the feeder cattle market appears to have downside risk due to the stronger feed grain prices. Feedlot margins are hovering in positive territory but unless we see significant upside in the fed cattle market, feedlot operators will be hesitant to pay higher prices for feeder cattle.
During the first half of October, Lethbridge-area feedlots were buying feed barley in the range of $245/mt to $252/mt delivered. At the same time, U.S. corn was trading into southern Alberta in the range of $245/mt to $252/mt. There are a couple of factors that could cause the barley and corn markets to strengthen over the winter.
As of October 9, Alberta farmers had combined only 53 per cent of the barley crop and 56 per cent of the spring wheat. Saskatchewan farmers had harvested 81 per cent of the barley and 65 per cent of the spring wheat. The delayed harvest will likely result in lower production estimates on subsequent Statistics Canada surveys. As of October 9, there was approximately 3.5 to 4.0 million mt of barley out in the field. The main question is how much of this crop will be harvested this fall or next spring.
Statistics Canada’s model-based crop estimate had barley production at 8.2 million mt, up from last year’s output of 7.9 million mt. Given the large percentage of the crop out in the field, the domestic market will function to ration demand away from export channels. Second, the barley market will have to trade higher to encourage the use of alternate feed grains.
Western Canada will probably have about 3.5 to 4.0 million mt of feed-quality wheat, which is equivalent to the annual domestic demand in a normal year. Therefore, the main alternative feed grain is U.S. corn. The USDA estimated that average corn yield at 180.7 bushels per acre on the October World Agriculture Supply and Demand Estimates report, down from the September yield of 181.3 bushels per acre. This would still be a record yield but it is important to note that the supply situation is not growing but rather contracting. Remember the old saying that the bearish market needs to be fed negative news every day otherwise the market trades sideways or higher. Given the adverse weather in parts of the Midwest, we may see further downward revisions on the USDA yield surveys.
Another factor to take note of is that the USDA raised the export projection. Global corn stocks have potential to drop to eight-year lows and the U.S. will be the supplier to the world. Ending stocks of U.S. corn for the 2018-19 crop year will drop to 1.8 billion bushels which is slightly above the five-year average. Cattle producers will have to watch South American growing conditions because the world cannot afford a crop problem in Argentina or Brazil otherwise U.S. and world stocks will be historically tight next spring.
The feed grains complex has likely put in the seasonal lows. The other leg of the margin structure is the fed cattle market. I’m not going to go into detail but the April live cattle futures traded up to $124.90 on October 2; however, the market has struggled to move above the $125 level. Remember, last year’s high was in the range of $128 to $130. Given the year-over-year increase in production, it will be difficult for the fed market to move higher. U.S. feedlot operators were able to lock in a positive margin for the first quarter of 2019 but this profitability has eroded. Notice the June live cattle futures are trading at a $7 discount to the April contract. The live cattle futures are factoring in a bearish supply situation for the second quarter of 2019, which will limit the upside in the nearby feeder market. Over the past month, yearling prices have gained on calf values. Moving forward, yearlings are expected to soften. The highs are likely in place.
In conclusion, stronger feed grain prices and softer fed cattle prices for the second quarter of 2019 will cause feeder cattle prices to soften. The seasonal highs are likely in place for the feeder market and producers can expect further downside. Cow-calf operators should market their feeder cattle sooner rather than later. Backgrounding operators should buy price insurance on 100 per cent of their production because the feeder cattle futures will grind lower as feed grain prices ratchet higher. The feed grains complex will be very sensitive to South American growing conditions. If Brazil or Argentina experiences a drought, corn prices could shoot up to historical highs. Keep an eye on the long-term weather outlook.