Feeder cattle prices reached historical highs earlier in spring and the market has been relatively stable throughout the summer. The market has been characterized by lower volumes and various quality over the past couple of months which can make it hard to define.
The factors that drove the market higher during the spring time frame have significantly changed and there is a fair amount of uncertainty moving forward. Feedlot margins were hovering in negative territory in August, which has caused a defensive attitude amongst buyers for the first time in the last two years. At the same time, feed grain prices have been quite volatile with the market facing a larger-than-expected corn crop while barley stocks remain relatively tight. I’ve received many inquiries in regards to the price outlook for the fall period; therefore, I thought this would be a good time to go over the fundamental factors and how this could influence the price structure.
Alberta fed cattle prices reached up to $204 earlier in June but dropped nearly $20 over the past two months as the market was trading near $184 in mid-August. On a 1,500-pound steer, this difference equates to $300. It appears the upward trend in fed cattle has come to an end as U.S. beef production during the third and fourth quarters of 2015 will exceed year-ago levels.
Lower beef supplies have been a major factor driving fed and feeder cattle higher but the contraction phase is over. I’ve attached the quarterly beef production estimates below. Notice that fourth-quarter production for 2015 is similar to last year; however, during the first quarter of 2016, beef production is expected to be 200 million pounds above year-ago levels followed by a year-over-year increase of nearly 650 million pounds in the second quarter. At this time, analysts are expecting total 2016 beef production to be 1.1 billion pounds above 2015. We may see feedlots be more aggressive on 800-pound-plus cattle that will be marketed in the early winter-period. Feeders placed in the fall of 2015 will be facing a burdensome supply scenario when marketed during the second and third quarters of 2016.
We’ve seen Canadian exports of fresh and chilled cuts slow down so that the year-to-date pace is similar to last year. Basis levels for fed cattle are expected to come under pressure due to growing U.S. beef supplies next spring.
The Canadian economy is facing a recessionary environment, which will stem consumer spending. U.S. economic data suggests the U.S. economy is not improving but rather levelling off. Consumer confidence is starting to ease and unemployment rates are stagnating.
I’m expecting growth in U.S. housing starts to subside and with the strong dollar, manufacturing and industrial output has potential to weaken. The average American consumer will not see income levels increase but may rather rein in restaurant and at-home food spending for the remainder of 2016.
Keep in mind September and October is a period of seasonally weaker demand for beef products. Growing supplies of U.S. pork and poultry may also temper beef demand, especially if the economy starts to slow down and consumers substitute for alternate proteins.
The feed grain markets have been extremely volatile with various weather patterns causing a fair amount of uncertainty. It appears U.S. corn supplies will be rather burdensome for the 2015-16 crop year but with the weaker Canadian dollar, imports of U.S. corn and DDGS will be limited for the time being.
Canadian barley stocks will remain historically tight for the second year in a row and approximately 85 per cent of the Canadian wheat milling quality. We may see some pressure on feed grain prices during harvest but then the market is expected to percolate higher after the U.S. corn crop is in the bin. It is difficult to forecast the outlook for Canadian feed grain prices given the many variables that are uncertain at this time. However, don’t count on feed grain prices to fall apart, and any downside will not be enough to offset the weaker outlook for fed cattle.
At the time of writing this article, the June 2016 live cattle futures was trading at a $10 discount to the December contract which may limit the ability of feedlots to lock in a profit. In past years, the feeder cattle market has trended higher throughout the fall period. We may see this pattern again in September and October but if feedlots experience negative margins for a prolonged period, eventually the feeder cattle market will start to grind lower. My bias given the current environment is that cow-calf producers will want to sell earlier, rather than later in the fall or early winter.
Backgrounding operators need to be extremely careful buying calves because selling yearlings next spring into a depressed market could evaporate earnings from past years.