In January of 2010, a feeder association in Western Canada asked me to speak at their annual conference. This conference was held just after the major recession of 2009 and these producers wanted to look at options such as supply management for feeder cattle, government price support programs and other ideas to provide a guaranteed price. I couldn’t attend the conference but I wrote them an analytical paper.
The conclusion of my analysis stated that in one year, they would forget they ever discussed these types of ideas. Many readers can remember the feeder market started to percolate higher during 2011 and then proceeded to trend upward until the spring of 2016. The cattle herd was in a long-term contraction phase. At the same time, beef demand was steadily improving as the economy moved into the expansion phase of the business cycle. I can assure you these producers were not discussing supply management for feeder cattle during the price rally of 2015. I bring up this example because I’m currently hearing the same type of “2009 rhetoric” from many cow-calf producers in Western Canada.
Now that the worst of the COVID-19 pandemic is likely behind us, I’ll provide a brief overview of the market dynamics that will influence the feeder market during the fall and winter of 2020. The recent drop in the feeder cattle market will likely be short-lived for four main reasons.
First, it’s important to remember that the U.S. cattle herd is contracting. The U.S. calf crop peaked in 2018 at 36.3 million head. For 2019, U.S. calf crop was 36.059 million head and the 2020 U.S. calf crop is projected to come in around 35.7 million head. The 2020 U.S. cow slaughter is exceeding year-ago levels so we’ll likely see further contraction in 2021. This is four years in a row of lower calf crops.
The second factor influencing feeder cattle prices is feedlot placements and when these cattle will come on the fed market. The February and March feedlot placements were sharply below year-ago levels, especially in the 799- to 999-pound categories. The lower slaughter pace during April and May will result in larger than expected beef production during the summer months. If the slaughter pace returns to normal as expected, this backlog will likely be alleviated during August. More importantly, from September through December, beef production will experience a year-over-year decrease. For the first quarter of 2021, beef production will be sharply below the first quarter of 2020 given a traditional placement schedule during the fall period. Remember, the feeder cattle futures reflect the live cattle futures five months forward. As the deferred futures start to percolate higher, this will result in stronger yearling prices and spill over into the calf market for the fall period.
Third, feed grain prices are under pressure. U.S. corn prices are expected to dip to 10-year lows during the fall period due to the sharp year-over-year increase in U.S. corn production. Lower input costs will also contribute to stronger feeder cattle values during the fall period.
Fourth, from a demand perspective, the recession of 2020 is not like the recession of 2009 for one main reason. This current recession affects consumers with lower incomes. In the U.S., approximately 30 per cent to 40 per cent of the unemployed are wage earners making under $15 per hour. These workers will find work quickly once the economy rebounds. As well, the government support cheques will make sure their incomes don’t miss a beat. Many lower-income workers are making more under the government program than their wages.
As you move up the income bracket, the unemployment rates decrease. Only five per cent of wage earners with a salary over $100,000 are laid off. The 2009 recession was more severe for middle- to upper-class wage earners. A one per cent increase in consumer income results in a one per cent increase in beef demanded. Beef demand will rebound much quicker than in 2009. By the first quarter of 2021, we’ll likely see beef demand return to normal. Consumers that buy beef tenderloin or eat at white table cloth restaurants are not severely affected and won’t change their buying behaviour.
In conclusion, the worst of the COVID-19 pandemic is behind us. Four consecutive years of lower calf crops in the U.S. will result in a year-over-year decrease in beef production during the fourth quarter of 2020 and first quarter of 2021. This will result in stronger feeder cattle prices during the fall period. The year-over-year increase in U.S. corn production will result in lower feed grain prices during the 2020-21 crop year.
There is an old saying, “This country was made on next year.” Cow-calf producers need to keep the factors I discussed in the forefront of their minds. I’m pretty optimistic for feeder cattle prices this fall and winter.