Cattle feeding is always a risky business. But no one foresaw the collapse in U.S. live cattle prices for the second fall in a row. One can only hope that by the time you read this, prices have put in a bottom and are on the rebound, however modest. The same applies for Canadian prices.
Cattle feeders north and south of the border have suffered losses this year that are far worse than expected. U.S. feeders have seen a massive reversal in their financial fortunes since recording their second-best equity gains of US$5.4 billion to US$5.5 billion in 2013-14. Since January last year they have lost an estimated US$5.7 billion in equity, a record for any such period. Cattle-feeding returns in Canada likely have suffered a similar reversal.
U.S. losses have mounted in recent weeks as cash live cattle prices fell to their lowest level in six years. Prices (basis USDA’s five-area steer) averaged nearly US$119 per cwt the first week of August. They fell the second week of October to US$97.59 per cwt. That’s more than a US$21-per-cwt slide in 10 weeks.
The added trauma to this collapse is that prices in September last year fell more than US$29 per cwt in six weeks because of delayed marketings all summer. Cattle feeders were determined to avoid a repeat but were stymied by a resolutely negative futures market. One reason, ironically, for this fall’s collapse is that fully hedged cattle feeders took advantage of a positive basis between cash and futures prices to sell cattle. This allowed them to sell aggressively by accepting lower cash prices. But those cattle feeders without any price protection had to sell also at those lower prices and incur huge losses.
At time of writing, there was still no indication that a low was in the market and what it would take for the market to rally. What’s clear is that prices look most unlikely to climb back to the US$120-per-cwt level, which looked attainable only three months ago. The futures market doesn’t believe prices can rally at all, as the October and December live cattle contracts, at least on October 14, were well below US$100 per cwt and the February contract was just below that mark.
Cattle-feeding operations that fully hedge their cattle will survive the dramatic erosion in equity. But those that are not might not survive. As you know, the erosion has already claimed its first major casualty in Canada. The country’s largest cattle-feeding operation, Western Feedlots Ltd., High River, Alta., shocked everyone by announcing that it was to stop buying cattle after 58 years in business.
The record feeding losses continue to force U.S. prices for calves and feeder cattle lower, so returns for cow-calf producers continue to erode almost every week. The lofty returns of US$550 per cow in 2014 are now a distant memory and returns might be as low as US$15 per cow this year, the lowest since 2009. That’s the latest estimate from the Livestock Marketing Information Center, which only two months ago estimated returns at $70 per cow.
Huge returns in recent years provided the economic foundation to aggressively grow the U.S. beef cow herd, notes LMIC. The economic stage has quickly changed but the adjustment in cattle numbers is just starting, it says. Latest forecasts are for the U.S. beef herd to expand again this year. But there’s every indication that any further expansion might come to an abrupt halt in 2017, two years earlier than expected.