I’ve received many inquiries from cattle producers across Western Canada regarding the price outlook for feeder cattle. Ranchers are asking: When would be the best time to sell their calves? Backgrounding operators are questioning the best time to purchase calves.
At the time of writing this article in mid-July, yearling prices were making fresh 52-week highs; however, calves were trading at similar prices to year-ago levels. Many producers are looking at forward contracting their calves for late September or October delivery. Calves for October delivery weighing around 600 pounds don’t appear to be reflecting any premium from current price levels. The market is relatively flat into forward positions. Therefore, I thought this would be an opportune time to discuss the price structure and the overall market outlook for feeder cattle.
During mid-July, yearling steers in central Alberta weighing 900 pounds were trading in the range of $189 to $192; 800-pound steers were quoted at $205 while 700-pound calves were selling for $215. Steer calves averaging 600 pounds were readily moving in the range of $225 to $230. Which weight category is fairly valued and which weight category is undervalued? Keep in mind the feeder market is a purely competitive market. Feedlot operators will bid up the price of feeder cattle until feeding margins are $0/head.
The two main influences on the feeder cattle market are the price of feed grains and the value of the finished animal. Barley delivered to the Lethbridge-area feedlot was trading at $350/tonne in late July. For September delivery, barley was quoted at $290/tonne but for January through March 2022, feed barley was quoted at $325/tonne delivered in southern Alberta. The cost per pound gain will drop sharply during the harvest period but then increase later in fall and winter.
For example, for a 600-pound steer, if the market for barley increases by $30/tonne, the price of the animal needs to decrease by about $7/cwt or $42/head. This assumes the feedlot holds the animal until it is finished at around 1,250 to 1,300 pounds.
The most important factor determining the price of feeder cattle is when the animal will be ready for processing. At the time of writing, the December 2021 live cattle futures were trading at $132.50 and the April 2022 live cattle futures at $139.50. Converting from U.S. to Canadian dollars, this would be about a $9 premium over the December contract. This is significant.
Let’s assume for a moment that feed grain prices were constant through the feeding period. If Alberta packers are paying $160 in December 2021, the price should be $169 in April 2022. A 1,300-pound fed steer in December at $160/cwt or $1.60/lb. is worth $2,080. A fed steer at 1,300 pounds at $169/cwt or $1.69/lb. is $2,197. Therefore, the difference in the value of the finished steer between December 2021 and April 2022 is $117.
Between July 31 and September 15, the price of barley will drop by nearly $50/tonne. There is an inverse in the barley market. Barley prices are expected to stay flat through September and October and then percolate higher over the winter period. Fed cattle prices are expected to make seasonal lows in September and then slowly increase through fall and winter. The Alberta fed cattle market will likely make a seasonal high in late April or May of 2022.
Currently, I believe that yearlings are fairly priced given the projected changes in barley and expected price when the animal is finished in the final quarter of 2021. Yearling prices are expected to make seasonal highs during early October. These 850-pound yearlings will come on the fed market during April 2022; at the same time, feed grain prices will be the lowest and allow feedlot operators to lock in their feed grains.
Right now, the calf market appears to be trading economics from last year. Cow-calf producers will want to hold onto their calves into November or December. If possible, try to carry your calves until they are over 700 pounds. This will help you achieve the true value. I often receive calls from cow-calf producers stating that they always sell their calves in October because this is the way it has been done for the last three generations. October is seldom the highest price of the year.
For backgrounding operators, don’t buy calves in November and sell them four months later and think you will make money. This seldom works because the market is too efficient. Backgrounding operators need to be strategic. For example, this last April or May, one could have bought 650- or 700-pound calves, intending to sell them in September. You’re buying calves when feed grain prices are high and selling when feed grain prices are low. If you buy calves in November and sell them in February or March, these animals will only be finished in June or July, which is typically the lowest price for fed cattle. At the same time, feed grain prices are highest in the spring and summer. The traditional schedule for most backgrounding operators will not result in profitability in the long run.
In conclusion, cow-calf producers and backgrounders need to push their pencils and keep on top of barley prices and fed cattle prices. All the information you need to make sure your feeder cattle are valued fairly is at your fingertips. It takes some work, but it will pay off in the long run.