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Feeder cattle market reality

Market Talk with Jerry Klassen

I’ve received many calls from feedlot and backgrounding operators in regards to the outlook for feeder cattle. Earlier in fall, there remained a fair amount of excitement that was left over from last spring. Feeder cattle prices held up remarkably well even though feedlot margins were struggling in red ink. We now find Alberta packers buying fed cattle in the range of $165 to $168 and break-even pen closeout values are closer to $195. Feedlot inventories were at seasonal lows during September but replacements coming into the feed yard have a break-even near $200 for next April. Earlier in fall, I heard excuses such as, “the weather is optimal,” or, “buyers say I have to start buying,” and the old adage, “I need to buy a certain amount anyway.” Despite the inability for producers to hedge or lock in a profitable margin, there was a frenzy in the market carried over from last spring. However, at the time of writing this article, the fall run is at the peak with auction markets selling seasonally high numbers of feeder cattle. Reality is setting in on what type of values are reasonable for replacement cattle. There are a number of risks moving forward in which cattle producers need to be aware of.

First, producers need to be aware of beef and pork production estimates for 2016. U.S. pork production has exceeded year-ago levels each quarter throughout 2015 and we’ll likely see marginal increases through 2016. Pork prices have been functioning to encourage demand which has spilled over into the beef complex. Cold storage supplies of beef are rather high and packers have delayed delivery of purchases by as much as a month in some cases. I’ve mentioned in previous articles that the contraction in the beef complex is over. From the fourth quarter of 2015 and throughout 2016, beef production will experience a year-over-year increase with the largest jump coming in the second quarter of 2016. I feel this is the largest factor weighing on the fed and feeder cattle markets at this time. Production is reaching levels similar to 2012 and 2013 so prices should be very similar to that time frame.

us-quarterly-pork-production

Canadian year-to-date feeder cattle and calf exports to the U.S. were 279,038 head, which is down 22 per cent from last year’s pace of 357,549 head. There is approximately 80,000 head of feeder cattle that have to be absorbed, mostly in Western Canada. Throughout the fall we’ve seen prices in eastern Saskatchewan and Manitoba trade at a premium to most Alberta markets. At times, feeder cattle from central Alberta have even sold to Ontario buyers given the price spreads between Manitoba and Alberta. This spread is not unexpected due to the fact that Alberta has the largest supply of feeder cattle compared to other provinces. Given the current feedlot margins in the U.S., we’ll likely see this slower export pace continue during the first half of 2016, or at least until the margin structure in finishing feedlots moves into positive territory. There is a risk that the export pace declines even further once the current round of losses comes to fruition.

For the week ending October 31, year-to-date Canadian exports of slaughter steers and heifers were 176,295 head, down 47 per cent from 332,449 head last year. Western Canada clearly has some cattle to work through with packers well supplied in the short term. Despite the weaker Canadian dollar, bids from U.S. packers are about a $5 discount to Alberta prices. The feeder market will have a difficult time sustaining strength until Alberta feedlots work through their market-ready supplies.

us-quarterly-beef-production

Feed grain prices are another factor that will influence feeder cattle values. We haven’t seen significant imports of U.S. corn or DDGS so far this crop year. However, given the changes in Chinese import policy, we’ll likely see DDGS price into Western Canada later in winter. Feed barley and feed wheat prices will likely hold value over the winter with seasonal fluctuations with weather and logistics. Earlier, I was quite bullish on feed grain prices but the recent Statistics Canada report shows the crop is larger than anticipated. The adverse weather during harvest has resulted in about 40 per cent of the hard red spring wheat crop grading No. 3 or lower. For these reasons, I’m not expecting significant upside in the feed grains complex.

In conclusion, feeder cattle prices are expected to trend lower. Growing beef supplies will keep feedlot margins under pressure and it looks like this could continue until next April or May. Due to the decline in exports, the feeder market needs to absorb larger supplies. The year-over-year decrease in live cattle exports has resulted in a backlog of market-ready supplies resulting in weaker demand for feeder cattle in the short term. I feel there is further downside of approximately $20 to $30 in feeder cattle prices longer term.

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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