Feeder cattle prices have been percolating higher since November 2016 and I’ve received many inquiries regarding the price outlook for the fall of 2017. The U.S. cattle herd is moving through an aggressive expansionary phase while the Canadian cattle inventory has remained relatively stagnant. The year-over-year increase in feeder cattle numbers south of the border has tempered Canadian exports. At the same time, finishing feedlots have experienced favourable margins over the past couple of months. The Canadian dollar has weakened and it appears that the market fundamentals suggest further deterioration. Feed grain prices remain under pressure and supplies will remain burdensome into the new crop year. I’ve changed my outlook on the feeder cattle market since last fall and thought I’d update readers on the changing perspective.
To start off, looking at the numbers can be intimidating but keep in mind there are many factors influencing the feeder market besides overall supplies. The 2016 U.S. calf crop was estimated at 39.4 million head, up nearly one million head from 2015; U.S. beef cows that have calved as of January 1 were also up one million head over year-ago levels, coming in at 31.2 million. The U.S. cow herd is relatively young and there is no signal that producers are pulling in the reins on expansion.
The 2016 Canadian calf crop came in at 4.350 million head, up a meager 23,000 head from the 2015 crop of 4.327 million head. Beef cows that have calved numbers were relatively the same as last year and heifers for beef cow replacement numbers were actually down two per cent from year-ago levels as of January 1. We’re not seeing the expansionary activity in Canada. During 2016, we saw a sharp year-over-year decline in feeder cattle exports to the U.S. and this trend will likely continue in 2017.
In Alberta and Saskatchewan, we’ve seen a massive consolidation in the finishing feedlot sector. A number of small, medium and larger operations are no longer in business while some feedlots have been taken over by larger operators. When an industry moves through a massive consolidation due to low margins, there is a serious effect on the market for feeder cattle. One can only look at the grain industry as an example to understand the consequences. For years, finishing feedlots experienced a very tight or even negative margin structure. While 2014 and first half of 2015 were more profitable, the latter half of 2015 and all of 2016 were quite devastating to say the least. We’ve now seen a quick turnaround in margins since December, but feedlots are extremely cautious to bid up the price of feeders. The price outlook for fed cattle is rather negative with the building U.S. supplies in the third and fourth quarters. Basis levels are rather strong for fed cattle and some producers are questioning whether the futures market is even relevant. At the time of writing this article, the cash and futures are too far out of line with delivery close at hand.
On the flip side, the world and Canada will remain awash with feed grains in the upcoming crop year barring any adverse weather in a major producing region of the Northern Hemisphere. If trend yields materialize in the U.S., the decrease in corn production will not be significant, even if acres drop by 3 to 4 million. The market could become quite volatile during the summer but the rallies wouldn’t be significant to change the feeding margin structure. The Canadian dollar has become less relevant with the limited trade due to year-over-year increases in the U.S. calf crop. In any case, U.S. crude oil inventories are sharply above year-ago levels, and this will not change over the course of the summer. The U.S. Federal Reserve will increase their lending rate while the Bank of Canada is not set to move any time soon. Currencies tend to trend for long periods of time; the Canadian dollar may have short-term bouts of strength but the trend is lower.
The result of all this uncertainty has potential to result in a rather stagnant outlook for replacement cattle. The hesitation of feedlots to bid aggressively for replacements, given the outlook for lower fed cattle prices in the latter half of the year, will limit further upside. At the same time, the burdensome feed grain situation, along with limited export demand for feeders, will keep the market controlled by domestic fundamentals. I’ve attached a chart with my projection for 800- to 900-lb. steers monthly average for 2017. We may see minor slippage during the fall period but not wild swings as in past years.