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Feeder cattle market outlook

Canadian feeder cattle prices have traded at record highs over the past month due to lower feed grain values and historically strong fed-cattle markets. Cattle inventories continue to shrink in Canada and the U.S. and the market is functioning to encourage expansion which has also contributed to the higher price structure. The market can become extremely volatile at extreme highs whereby values from week to week can be quite variable. We all know how the market dynamics can change within a short period of time and the financial risk has certainly increased. I’ve received many inquiries in regards to the price outlook for feeder cattle as calving season starts for another year; therefore, I thought this would be a good time to provide an overview of the market influences which will be driving the feeder market throughout 2014.

The two most important factors influencing prices of feeder cattle are the price of feed grains and the expected selling price of the finished animal.

The December 31 Statistics Canada grain stocks report was considered supportive to the market and suggested that 2013 barley yields may have been overstated. Statistics Canada estimated domestic feed barley usage from August 1 to December 31 at 3.7 million mt, up from 2.9 million mt during the same period of 2012.

Wheat used for feed consumption for the same period was estimated at 3.6 million mt, compared to 2.9 million mt last year. Combined domestic feed usage of wheat and barley was up nearly 1.7 million mt during the first five months of the crop year which is a bit high given the cattle-on-feed inventories and overall hog numbers.

I’m still projecting a Canadian carry-out of nearly 2.8 million mt which is up from a 10-year average of 2.1 million mt so stocks will remain burdensome until the end of the crop year.

Looking forward, the industry is anticipating a marginal year-over-year decline in Canadian barley acreage. For 2014-15, the carry-out will likely finish closer to 2.4 million mt which is closer to the 10-year average. Barley prices in Western Canada stabilized during late winter and appear to be trading in the range of $150 to $156/mt delivered the feedlot in southern Alberta.

The main point is feed grain prices are not getting “more bearish” but rather neutral for the time being and then, depending on the upcoming crop size, we could see slightly higher prices in the fall given the lower production. This will temper the upside potential in the feeder market.

Fed-cattle prices also reached record highs in late January which resulted in very strong feeding margins and provided some breathing room on buying replacement cattle. Fed-cattle prices in the U.S. peaked out at $150/cwt while Alberta values topped at $148.50/cwt.

At the time of writing this article, the Alberta market has dropped to $139/cwt. Seasonally fed-cattle prices generally stay firm into the March period and then come under pressure as second-quarter beef production increases. In past years actual beef production tended to come in larger than projected which further weighs on prices once these supplies materialize. Carcass weights have been running above year-ago levels and this will likely continue into the summer.

Consumer spending also tends to top out in March and eases slightly into the summer. Adverse weather in Eastern Canada and the eastern U.S. seaboard has caused restaurant traffic to come in lower than expected and weather conditions will continue to be a main factor for restaurant demand during the spring and summer. For 2013, American “away from home” food spending was up 13.3 per cent over 2012 while “at home” food spending was up a marginal 3.3 per cent. It’s important to note that disposable income has not increased for the average consumer so it will be difficult to sustain higher values at the retail level. It usually takes about four months for restaurants to adjust menu prices.

I’m expecting Alberta fed-cattle prices in the summer months to drop to the range of $125 to $132/cwt. Break-even values on 850-pound steers bought in early February are in the range of $129/cwt to $132/cwt. While feeding margins have been quite healthy through the winter, we can expect margins to narrow in the summer and fall period. This will also weigh on feeder cattle prices.

In conclusion, I feel that feeder cattle prices have likely topped out. Values for replacement cattle are expected to stay firm through March and then start to trend lower into the summer following the prices of fed cattle. Narrower feeding margins will weigh on the price of replacement cattle in the second and third quarters.

Canadian barley and U.S. corn production will have a large influence on feeder cattle prices during the September through December period. Cow-calf producers will want to be more aggressive sellers in the short term. If you plan on selling calves in the summer, it would be prudent to have some price protection in place. Backgrounding operators should also have some price insurance on current purchases. We all know how the market behaved back in 2011 and 2012 and buying feeder cattle in late winter or early spring can be very risky.

Gerald Klassen analyzes markets in Winnipeg and also maintains an interest in the family feedlot in southern Alberta. He can be reached at [email protected]

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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