I’ve had many calls over the past few weeks regarding the outlook for feeder cattle. U.S. feeder cattle prices appear to be reaching historical highs while Canadian prices have been rather stagnant throughout the winter and early spring. Producers are wondering when their local market will catch up to values south of the border. Ranchers are also asking about the longer-term outlook for the fall of 2010 and winter of 2011.

In the short term, we should see prices in Western Canada slowly ratchet higher. During the fall and winter, feeder cattle exports were down sharply from year-ago levels causing more animals to be sold in the domestic market. However, it is important to note that Canadian feeder cattle exports generally decline in June and July. During these summer months, the Canadian market is generally a “domestic market” because exports run at minimal levels. This will likely be the time frame when the Canadian market catches up to the U.S. price structure. However, feedlot operators are recognizing this short-term opportunity and starting to bid up the local market. Finishing margins have improved significantly over the past month and feedlot operators are starting to pass their good fortune on to the cow-calf producer. Available feeder cattle supplies will decline sharply during the summer months, which should result in firmer prices.

The U.S. and Canadian economies are moving into expansion and this will be the main factor driving prices higher for wholesale beef, slaughter cattle and feeder cattle. I expect U.S. unemployment to drop from the current level of 9.7 per cent to eight per cent over the next eight months. Consumer confidence should rally from the current level of near 50 to upwards of 75 by December of 2010. U.S. retail sales have been quite strong for higher-end luxury items and this is a positive sign that higher-end steak houses will see increased traffic this year.

Equity values are reaching 52-week highs and this suggests that companies will start hiring and spending money. Business travel and expense eating is improving as hotels and resorts experience a rise in bookings. The travel industry is also reporting higher bookings for cruises and other luxury getaways. The leisurely traveller is coming back on stream as summer approaches. All these factors are very important for beef demand longer term. Keep in mind a one per cent increase in consumer spending equals a one per cent increase in beef demanded.

Given the current demand scenario, the fall period is also looking quite favourable for the feeder market. U.S. and Canadian feedlots will have realized about four or five months of positive margins and there will be plenty of enthusiasm during the fall run. However, yearling supplies will be down from last year due to the lower calf crop in the latter half of 2009. These are usually the feeder cattle that come on early in the fall period as yearlings.

Calf prices in the fall period are also expected to be $10 to $12 per cwt above current levels given the tighter supply scenario. There is a high probability that feeder cattle exports will be back to near normal during the fall of 2010. This is largely due to ideas that more producers will age verify and vaccinate their calves in Manitoba and Saskatchewan. There is always a small increase each year, which will aid the export potential.

The U.S. cow slaughter is running above earlier projections which will likely result in a shrinking North American cattle herd for the fifth straight year. Past history tells us that the U.S. cow-calf producer needs one year of very strong prices before the expansion phase occurs. During the spring of 2011, there is potential for U.S. producers to hold back heifers which will cause feeder numbers to be lower than normal. Assuming that beef demand holds up and fed cattle prices stay strong, feeder cattle prices should stay firm for the first half of 2011.

The past couple years have been quite discouraging for the cow-calf producer. However, the next two years should result in a rebuilding of equity. It was only in January when many producer meetings were discussing how negative the cattle situation was. The old market adage that producer sentiment and market vulnerability is always most negative right at the lows is proving true again. This year was no different as prices are now showing signs of life. U.S. feeder prices have been higher each week since January.

Jerry Klassen is a commodity market analyst in Winnipeg and maintains an interest in the family feedlot in southern Alberta. He writes an in-depth biweekly commentary called Canadian Feedlot and Cattle Market Analysis for cattle producers in Western Canada. He can be reached by email at[email protected]or 204-287-8268 for questions or comments.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or futures or futures options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future. Do not use this information to make buying or selling decisions. This outlook may be wrong and could cause adverse financial consequences if decisions are based on this information.