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The similarities between 2009 and 2020

Market Talk with Jerry Klassen

The U.S. and Canadian economies suffered the worst year-over-year contraction in GDP in history during the second quarter of 2020. U.S. GDP contracted at 32.9 per cent on an annual basis during the second quarter; the official Canadian data at the time of writing this article was not yet released but analysts expect the drop in output to be 40 per cent.

The feeder cattle market appeared to soften during March and April; however, in early August, yearling prices were making fresh 52-week highs. Calf prices were also near 52-week highs earlier in summer. Feedlot margins have been in negative territory on unhedged cattle throughout the spring and summer; however, producers have recently been able to hedge profitable margins in the deferred positions. There are three main similarities I want to point out between the recession of 2009 and the economic contraction of 2020.

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First, the USDA estimated the 2020 calf crop at 35.8 million head, down from the 2019 calf crop of 36.1 million head and down from the 2018 output of 36.3 million head. This will be the second year of herd contraction in the U.S. At this stage, it looks like 2021 will also see a year-over-year drop in calf output. In 2009, the U.S. calf crop also experienced two years of contraction prior to the recession.

The second major similarity is low feed grain prices. In September 2009, corn futures made a low of $2.97/bushel after trading at historical highs a year earlier. At the time of writing this article, September corn futures were hovering near 52-week lows just above $3/bushel. Feedlot bids in the Lethbridge area were in the range of $195/mt to $200/mt for September delivery, down over $40/mt from prices during June and July. It looks like feed grain prices, especially corn, will trade near 12-year lows for the 2020-21 crop year.

The final similarity has to do with the economy and the exchange rate. The U.S. Federal Reserve dropped their key benchmark rate to 0.0 per cent to 0.25 per cent back in the spring while the Bank of Canada dropped their rate to 0.25 per cent. At the same time, the central banks have implemented major quantitative easing and credit easing policies. Without going into detail, these policies have caused interest rates to drop to historical lows.

Low interest rates will stimulate spending longer-term, drive inflation and cause the economies to move into a major expansionary phase. The four phases of the busines cycle are contraction, trough, expansion and peak. In past issues, I’ve written that the most profitable period for cow-calf producers is when the U.S. economy moves from the trough phase of the business cycle to the peak phase of the business cycle.

It is very important to note that the U.S. cow-calf producer’s decision to expand or contract is made nearly two years before the calves come on the market. For this reason, the U.S. cow-calf producer is usually contracting the herd when they should be expanding and vice versa. I’ve written articles for Canadian Cattlemen for over 20 years. Those of you who have followed my advice have been most profitable. Canadian producers need to do the opposite of the U.S. cow-calf producer to be successful over the long term. Canadian producers need to expand the herd when the U.S. herd is contracting and vice versa.

In conclusion, we now have a contracting U.S. cattle herd, historically low feed grain prices and a low interest rate environment. In the fall of 2021 and winter of 2022, the feeder market has potential to be very strong. For example, the deferred live cattle futures have been one market that has outperformed the S&P stock index since the lows back in March. On March 23, the managed money funds were net short 5,000 contracts on the live cattle futures. At the time of writing this article, they were net long around 36,000 contracts. Hmmm… They obviously know something that the average producer does not. I believe we are heading into a major inflationary period.

On a side note, I take many calls from cow-calf producers. Many producers feel that getting 10 cents above average local auction market prices is good marketing. This is not good marketing; this is luck of the crowd. Looking at macro-economic conditions influencing beef and cattle prices with sound risk management/marketing advice will beat top genetics long-term hands down.

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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