I’ve received many inquiries over the past month in regards to the feeder cattle outlook for the spring period. Most of these inquiries come from the feedlot sector because many operations are running sophisticated risk management programs that require balancing positions of fed cattle, feeder cattle and feed grain inputs. Backgrounding operations are also in the process of liquidating fall-placed calves or deciding to finish animals themselves.
For cow-calf producers, minor market fluctuations are less relevant but larger macro variables come into play when making their long-term marketing plans. Therefore, I thought this would be an excellent period to provide an overview of the market risks in the feeder cattle complex. Feeder cattle values are determined by the projected fed cattle price at the time of slaughter and feed grain costs. The last time I covered the feeder market was earlier in the fall and many variables have changed since that issue. Alberta fed cattle prices reached up to $187/cwt in early January 2015, which is up from an average price of $163/cwt in September of 2014. Secondly, analysts have a better idea of the longer-term estimates for beef production.
Alberta and Saskatchewan feedlot inventories are running five to seven per cent below year-ago levels over the winter period however, I’m expecting beef production for the first and second quarters to come in at 451,000 mt, down approximately eight per cent compared to 2014. The weaker Canadian dollar is supporting domestic fed cattle prices so that the U.S. market is reflecting a sharp premium over Canadian values. I’m expecting larger exports of live cattle over the next year as producers take advantage of the stronger market.
U.S. beef production is expected to experience a year-over-year decline of nearly 200 million pounds during the first quarter of 2015. Notice during the second quarter, beef production is expected to be very similar to 2014. U.S. cattle on feed inventories as of December 1, 2014 were up one per cent compared to December 1 of 2013 which suggests that beef production will not be down as much as expected during the second and third quarters of 2015.
The U.S. economy experienced stellar growth of five per cent during the third quarter of 2014 which is the highest level in more than a decade. Unofficial data suggests this robust consumer spending and business investment continued into the fourth quarter. Wholesale beef prices shot up as consumer spending increased but it now looks like wholesale beef prices have levelled off. Unless we see even greater economic growth in the first and second quarters of 2015, it will be difficult for wholesale beef prices to move significantly higher. Consumer confidence remains near sixyear highs and unemployment is poised to improve. Disposable income for the average consumer will marginally increase. Keep in mind that seasonally, consumer food spending slows in January and February.
Barley prices have been slowly percolating higher since the fall but this has done little to stem the rise in feeder cattle due to the stronger fed prices and weaker Canadian dollar. At the time of writing this article, cash barley in the Lethbridge area was trading in the range of $202/mt to $205/mt. Given the tighter fundamental structure, feed barley prices have potential to strengthen by $30 to $40 over the next couple of months and stay firm into summer.
While Alberta fed cattle prices have traded as high as $187/cwt, prices in the U.S. southern plains are near US$175/cwt. The US$0.85/Cdn. exchange rate suggests U.S. values are near $205/cwt. Feedlot break-even prices for the spring period are near $176/cwt in late winter and then move up to the range of $183/cwt to $185/cwt by early spring. There is a fair amount of room for feeder cattle to move higher. Based on past history feedlots generally bid up the price of feeder cattle until there is no margin in the finishing cattle. This may not hold given the unprecedented price levels but at least we can say that the feeder market is not expected to decline. At worst, values should stay rather flat. In my discussions in the industry, it appears we would need some major economic change (besides the drop in crude oil) to cause beef consumption to drop which would trickle down to the fed cattle market and then into local auction barns.
Gerald Klassen analyzes markets in Winnipeg and also maintains an interest in the family feedlot in southern Alberta. He can be contacted by email here.