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Feeder Cattle Overview

I ve had many inquiries over the past month regarding the price outlook for feeder cattle. Many producers are in the process of deciding if they should sell their calves now or background over the winter. Lower calf crops, feedlot placement abnormalities, historical-high feed grain prices and fed cattle prices are all factors to consider when analyzing the feeder cattle market. It is also important that producers watch the futures market for price signals. I often say, Producers need to understand what the market is trying to tell them.

In this article, I will provide a brief overview of the major factors influencing the feeder market and try to define the current fundamental structure.

The Canadian calf crop has been shrinking since 2007. In addition to lower calf numbers, cow-calf producers are starting to hold back on heifers. These two factors suggest that the available feeder cattle pool in Western Canada is down about 100,000 head or about two per cent in comparison to last year. The U.S. cattle herd is not expanding but the feeder cattle pool is down about 200,000 head or one-half of one per cent in comparison to 2010. The point is that the decrease from year to year is relatively negligible on both sides of the border.

More importantly, producers need to watch feedlot placements. The drought in the U.S. southern plains (Texas, Kansas, Oklahoma) has caused feeder cattle to be placed sooner than normal. From January through July 2011, U.S. feedlot placements totalled 12.380 million compared to 12.930 million head last year, which is an incease of nearly 550,000 head. Moving into the winter, placement numbers will drop below year-ago levels. We want to stress that placements seasonally decline in November and December and then marginally increase in January. January through March 2012 placements have potential to be down by as much as 200,000 head each month in comparison to 2010. This equates to a 12 to 15 per cent decline in available feeder cattle numbers. In past history, an eight to 10 per cent drop in feeder cattle placements increases fed and feeder cattle by three per cent to five per cent.

U.S. corn prices have come under pressure during the harvest season. However, the corn fundamentals will remain historically tight which should keep prices in the top third of the historical price range of $6 to $8 per bushel. However, we are seeing many feedlots in the U.S. southern plains use hard red winter wheat. Wheat fundamentals are relatively bearish in comparison to corn as the export market remains flooded with Black Sea supplies. Western Canadian barley supplies are also very snug and the wheat crop will be very good quality. Western Canada is deficit in feed grains and will have to import U.S. corn or DDGS. At the time of writing this article, DDGS were trading at a $10 to $15 discount to barley in the major feeding regions of Western Canada limiting the upside on barley. The overall bearish feed grain outlook for 2012 will now start to be friendly for feeder cattle prices.

April live cattle futures have been trading near contract highs of $128 per cwt and producers in Western Canada have been able to lock in fed cattle for late winter at some very high prices in excess of $120 per cwt. Firstquarter 2012 beef production will be down sharply in comparison to 2011 and this will keep fed cattle prices very firm in the March-April time frame.

In conclusion, I want to draw attention to the feeder cattle futures market spread between October 2011 and the March 2012 contracts. Notice back in June, the March 2012 contract was at a discount to October 2011. At the time of writing, the March contract was at a $4.90 premium to the October. The futures market is telling producers to hold on to their feeder cattle through the winter and sell in March. Lower feedlot placements in the first quarter of 2012, neutral to bearish feed grain prices and a strong fed cattle market reinforces the price action in feeder cattle futures.

GeraldKlassenanalyzesmarketsinWinnipegandalsomaintainsaninterestinthefamilyfeedlotinsouthernAlberta.Hecanbereachedat [email protected] or204-287-8268.

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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