Canadian farmers harvested 9.7 million tonnes of barley in 2025, up from the 2024 crop size of 8.1 million. Barley producers were aggressive sellers at harvest because yields were larger than anticipated. This selling pressure came as domestic feed demand was at a seasonal low during August, September and October. Canadian barley offers off the West Coast were competitive with other major exporters, such as Australia and Europe, for shipment into China and Saudi Arabia.

Canadian crop year-to-date barley exports for the week ending Jan. 4 were 1.4 million tonnes, up from 1.0 million tonnes last year. The export pace for Canadian barley slowed in January because export values were premium to Australia and Argentina. Cattle-on-feed inventories in Western Canada reach seasonal highs over the winter, which causes the domestic to strengthen above world values.

Canadian barley ending stocks for the 2025-26 crop year are projected to finish near 1.5 million tonnes, up from the 2024-25 carryout of 1.2 million tonnes.

Despite the larger ending stocks, we’re expecting the barley market to percolate higher over the next couple of months. Farmer selling tends to slow during road-ban season and the spring seeding period. As well, the fundamentals for the 2026-27 crop year will tighten, and the market will be extremely sensitive to weather.

The Canadian barley market needs to encourage acreage through higher prices. At this stage, our straw-poll survey suggests that farmers will seed 6.15 million acres. Using an average yield of 70 bushels per acre, production will drop to 8.6 million tonnes, which is below the 10-year average. Production below the 10-year average will cause prices to trade above the 10-year average. The barley market cannot afford a crop problem during the 2026 growing season.

We have a bullish outlook for the corn market, which will also be supportive for Canadian barley prices. U.S. feed demand is also running at seasonal highs while ethanol processing is near full capacity. U.S. corn export sales commitments were up 33 per cent from last year during the last week of January.

At the time of writing this article, South American corn production was uncertain. The main corn provinces in Argentina were experiencing drier conditions and above-average temperatures. In Brazil, the bulk of the exportable surplus comes from the second corn crop which is only seeded in February after the soybean harvest. Brazil is currently contending with La Niña conditions, which usually result in warmer and drier conditions. Therefore, the U.S. needs to carry the world on corn until April or May, which is when Brazil’s exportable surplus is available.

It’s also important to remember that U.S. corn acres in 2026 will be down from 2025. In 2025, the U.S. had record yields. At this stage, traders are only factoring in trend or average-type yields. There is a high probability that the U.S. will experience a year-over-year decrease in corn production.

The stronger corn market will be supportive for barley values during the summer. If drier conditions develop in Western Canada, Alberta barley will trade at a premium to imported U.S. corn.

We’ve been advising feedlot operators to extend barley or feed grain coverage into summer. If drier conditions develop in Western Canada or the U.S. Midwest, it will be prudent to extend coverage into new-crop positions. We’re expecting the July corn futures to trade up to the $5 per bushel level during the late spring period. In early February, July corn was around $4.40 per bushel.

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In this article, I want to provide an estimate of feeder cattle outside finishing feedlots as of April 1 on both sides of the border. This will likely calm fears that there will not be any feeder cattle available after April 2.

According to the USDA, U.S. feeder cattle numbers outside finishing feedlots as of January 1, 2025, totalled 24.557 million head, down only 0.5 per cent or 114,100 head from the January 1, 2024 number of 24.671 million. U.S. feedlot placements during January and February 2024 were 3.376 million head, down 305,000 head from the same two months of 2024. Some think that March 2025 placements will be similar to March 2024. Colder temperatures across the Midwest and Southern Plains delayed feeder cattle marketings from February to March. As of April 1, available feeder cattle supplies outside finishing feedlots were 19.435 million head, up 191,000 head from the April 1, 2024 number of 19.244 million head. This estimate does not take into account feeder cattle born during the first quarter of the year because these young feeder cattle are generally available for market. U.S. feeder cattle supplies are above year-ago levels.

According to Statistics Canada, feeder cattle numbers on cow-calf and backgrounding operations as of January 1, 2025, were 3.003 million head, up 31,600 head from 12 months earlier.

Alberta and Saskatchewan feedlot placements during the first two months of 2025 were 261,100 head, up 13,800 head from the same months of 2024. In this case, we also assume that placements during March 2025 will be around 146,000 head, the same as in March 2024. Total placements in Alberta and Saskatchewan during the first quarter of 2025 are estimated at 407,900 head, up 13,800 head from the previous year. We can subtract these placements from the total inventory number on January 1.

Regarding feeder cattle imports, we have to make a few assumptions. First, we assume that feeder cattle imports (mostly Holstein feeders) during the first quarter of 2025 are the same as last year as we don’t have official data for the first quarter. Imports during the first three months of 2024 were 77,398 head. Second, we assume that these cattle are imported and directly placed into finishing feedlots. We have to subtract this number from the placement data.

For the week ending March 22, Canadian feeder cattle year-to-date exports to the U.S. were 47,373 head, up from 30,400 head last year. To be conservative, we assume these feeder cattle exports are from Western Canada. For the first quarter of 2025, we’re expecting Canadian feeder cattle exports to reach 57,000, up from the year-ago level of 34,500 head.  

To calculate feeder cattle outside feedlots on April 1, we start with the January 1 inventory, subtract the placements and exports and add the imports. We estimate that feeder cattle outside finishing feedlots as of April 1, 2025, are 2.616 million head, down about 4,300 head from April 1, 2024. There will be feeder cattle available to purchase after April 1.

Seasonally, calf volumes at auction markets decline at this time of year with more cattle moving out to pasture. This tends to enhance prices for feeders under 700 pounds. Backgrounders were more aggressively selling fall-placed calves ahead of April 2. However, it’s important to realize that some of these cattle were sold in March for April delivery so it’s reflected in the feedlot placement data. This may also be a factor influencing feeder supplies after April 2.

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During the 2007-08 crop year, wheat and coarse grain prices traded at historical highs. Remember that barley and corn prices during the 2024-25 campaign were trading near or at five-year lows. The feed grain outlook is more important than ever with feeder cattle prices at historical highs.

Canadian barley stocks are expected to drop near historical lows at the end of the 2024- 25 crop year. Statistics Canada Stocks Report had barley supplies, as of December 31, 2024 down 500,000 tonnes from last year. Stocks report data confirms the 2024 production level and indicates the amount of barley used for feed.

Barley used for feed during the first five months of the 2024/25 crop year was slightly lower than year-ago levels. Barley exports have been exceeding year-ago levels but off-shore movement will likely slow. Export offers from Canada are premium to Australia, Black Sea and European offers. We’re expecting the 2024-25 ending stocks to finish near 656,000 tonnes, down from both the 2023/24 carryout and the 10-year average. At press time, feed barley in southern Alberta was discounted to imported U.S. corn values. This will likely change later in the crop year due to tighter barley stocks. We’re expecting a spring barley rally so that Alberta barley prices trade at a $10 to $15 premium to imported U.S. corn.

For the 2025-26 crop year, we’re expecting barley acres to increase by 7.7 per cent to 6.9 million acres. Input costs for barley are lower than other grains and barley tends to yield better than other major crops in drier years. Using a traditional abandonment rate and a 10-year average yield of 65 bu./ac., Canadian barley production is expected to reach 8.8 million tonnes, up from the 2024 crop and similar to the 10-year average.

We’re expecting Canadian barley demand to finish near average levels for the 2025-26 crop year. This would result in a carryout of 776,000 tonnes, still down from the 10-year average. The market cannot afford a crop problem, and will be very sensitive to yield developments during the growing season.

The USDA’s outlook for corn was somewhat bearish for the corn market but there are caveats to the projection. U.S. corn ending stocks for the 2024-25 crop year are projected to come in at 39 million tonnes, down from the 2023-24 carryout of 45 million tonnes and similar to the five-year average, which is around 39 million tonnes. The market is dependent on the upcoming crop to replenish supplies.

The USDA had 2025 acreage at 94 million, up 3.4 million acres from 2024. Using a traditional abandonment rate and a trend yield of 181 bu./ac., production was projected to reach 396 million tonnes, up from the 2024 crop (378 million tonnes) and five-year average (365 million tonnes). U.S. corn yields have not reached trend for six years.

During the 2024 growing season, the U.S. experienced near-perfect conditions and yields were 179.3 bu./ac. We’re expecting an average yield of 176 bu./ac. for the 2025 crop. This would result in a 385 million tonne crop and we believe this is more realistic, given weather patterns to date. Using the USDA demand projection, we expect U.S. corn carryout for the 2025-26 crop year to finish near 39 million tonnes, which is in line with the five-year average. A carryout near the five-year average will result in five-year average prices. We’re looking for the corn market to rally $1/bu. during the spring as the market incorporates a risk premium due to production uncertainty.

Much of the Midwest has received below-normal precipitation over the past six months. The weather trend indicates drier conditions.

Both Canadian barley and U.S. corn markets will be extremely sensitive to weather conditions and yield projections. The world coarse grain market cannot afford a crop problem in North America. If adverse weather does materialize, we could see sharply higher feed grain prices, which would weigh on the feeder cattle market.

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• Klassen: Feeder market has many factors to digest in 2025

After the Republican convention that took place in July 2024, producers were asking about former president Trump’s policies toward the cattle and beef trade. Does the current rhetoric justify concerns and should producers be aggressively forward contracting calves or fed cattle for 2025? After the election in November, president-elect Trump was quick to ignite fears. I had a discussion about this with a USDA representative. In the previous Trump term, after some “off the cuff” comments, the secretary of agriculture and other advisors would discuss the situation. President Trump’s campaign theme was to bring down food prices and adding tariffs to imported food products is not logical. One thing we can bank on is that Canada will do all it can to stem the tide of illegal immigrants crossing from Canada to the U.S. Don’t make irrational decisions from irrational comments. In this case, you wait until there is further confirmation. The media frenzy can often cause unwarranted fears. Don’t be a cynic and trust that Trump has intelligent advisors.

The second-most common question was regarding the similarities of the price rallies in 2014 and 2015 to the rally in 2024. When prices peaked in 2014 and 2015, the cattle herd had experienced two years of heifer retention. In 2023 and 2024, the cattle herds on both sides of the border were in contraction mode. The market hasn’t reached the level where producers are holding back a significant number of heifers. The only similarity between the two major price rallies is that prices went up. This past year, we’ve learned not to compare the two periods (2014 and 2024) to project future price activity.

This leads to the third question: When will cow-calf producers start holding back heifers to expand the herd? The feeder cattle market is functioning to encourage expansion. Usually, the first sign of expansion is a drop in the beef cow slaughter which is followed by heifer retention. The easiest way to expand the herd, if the producer has enough feed, is to hold back older cows for another year of breeding. The U.S. beef cow slaughter peaked in 2022 at 4.029 million head. During 2023, the official beef cow slaughter was 3.582 million head. At the time of writing this article, the U.S. beef cow slaughter was on track to finish 2024 at 3.02 million head. This is low enough to suggest that producers will be holding back heifers from the 2025 calf crop. The additional heifers will be bred in 2026 and the first calves will come on the market in the latter half of 2026 but for sure in 2027. Producers can expect the first year-over-year increase in calf crops in calendar year 2027. The main year-over-year growth in U.S. beef production from this herd expansion will occur in 2028.

Beyond Meat Inc. stock was trading over $230 in July 2019. At the time of writing this article, it was $5.05. Nothing more needs to be said. There have been studies that show the price of alternate meats has little influence on beef demand. I don’t consider products such as Beyond Meat alternate meats but “lab-produced products.” This product is highly processed which scares off the consumer that they’re trying to attract. This will never replace beef. Don’t worry about it.

It’s hard to argue that the price of retail beef in the grocery store is due to higher cattle prices. Beef is typically a loss leader for the grocery store. It’s at the back of the store and when you need help, you must wait. Many other costs such as labour, rent, energy and transportation are contributing to record-high food prices. If high beef prices were due to the lower cattle supply and lower beef production alone, then other food prices would not experience the same type of year-over-year increase. The old saying: farm products could double in price and you wouldn’t notice a change on the retail shelf, if all other factors stayed the same, rings true. The truth is in the industry. Cow-calf producers are not expanding their herds because the price of cattle is not high enough in this environment. Compared to 30 years ago, today’s cattle prices would appear very high, but not with the costs of today.

I appreciate the comments and questions and the debates from readers.

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• Klassen: Canadian feeder market jumps on trade disruptions

Who is long and who is short is the most vital piece of information when trading or planning your hedging or risk management strategy. To make an analogy, when a grain elevator with a capacity of 200,000 tonnes is filled with 195,000 tonnes, we can say the elevator is full. When this occurs, the basis widens out and the grain futures spread moves to full carry. Conversely, when the elevator only has 10,000 tonnes, it’s relatively empty. There is more pressure on the elevator to buy grain when there are three, 100-unit trains scheduled to load in the next week. A packer manages their ownership position of live cattle similarly.

Included in this article we have the commercial short position from the Disaggregated Commitments of Traders Report each week from June 6, 2023, to October 15, 2024 (see above). This is considered the position of the packers. When the short position is at 150,000 contracts, we say the packer is full. This is similar to the 200,000-tonne elevator filled with 195,000 tonnes. When the position is at -80,000 contracts, this is similar to a 200,000-tonne elevator with ownership of only 5,000 tonnes and three unit trains to load in the next week. The live cattle futures have strong commercial support when the commercial position is nearing -80,000 contracts. In most cases, the live cattle futures will trend higher when the commercial position is at this level.

I’ve talked about the Commitments of Traders before but I want to take this a step further. The USDA releases the Cattle-on-Feed Report each month. Most analysts just look at the first page for the total number of cattle on feed. However, the most important information from this report is on the fifth page, where the USDA shows how many cattle are placed each month in each weight category.

We can use this information to project how many market-ready supplies of steers and heifers will be available for any given month. In our example, I’ve shown the U.S. feedlot placements from February through July 2024 (see above). To project the market-ready supplies of steers and heifers for the month of October, we start with the February placements under 600 lb., which were up 15,000 head from February 2023. Onto this number, we add the March placements in the 600-699-lb. category which were down 55,000 head from last year. We continue to add the year-over-year change in the subsequent weight category for the next month. Onto this total of 40,000 head, we would add the year-over-year change of -35,000 head in the 700-799-lb. category during April. Using this information, we know that market-ready supplies during the month of October will be down 71,000 head from last year. The August 1 Cattle-on-Feed Report came out on August 23. At the end of August 2024, we know that the U.S. packer has little coverage in the cash market. We also know that market-ready supplies of steers and heifers during October will be down 71,000 head from October 2023. We can say that there was significant open demand and market-ready steer and heifer supplies are down sharply from last year.

On the flip side, back in September 2023, the commercial short position was near -140,000 head. At that time, the U.S. packer had significant coverage, and market-ready supplies for October 2023 were actually above October 2022. During the fall of 2023, the live cattle futures were trending lower.

For finishing feedlots, balancing the market-ready supplies of steers and heifers with the commercial position on the Commitment of Traders is vital for deciding when to forward contract or contract on basis. In our example, we knew in September that the U.S. packer had little coverage in the cash market and there was a year-over-year decrease in market-ready supplies for October. Stronger demand and lower supplies result in a higher price. Thus we see the futures rallying $16. For cow-calf producers, this information can be extremely helpful when determining the timing for marketing your calves or backgrounded cattle.

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Usually, cattle analysts focus on supply and the number of cattle coming available. However, producers are now concerned about beef demand and have to learn about another set of market influences. I’ve received many calls from cattle producers over the past month asking about unemployment rates, interest rates, equity markets and consumer spending. How are all these factors related to the cattle market? The cow-calf producer in Saskatchewan needs to know how some executive’s decision in Santa Clara, California, to lay off 15,000 workers affects their income. These two people are worlds away but connected very closely. Hopefully, this article will shed light on the connection.

• RELATED: Beef cow, replacement heifer numbers suggest producers aren’t ready to grow herds: FCC

There are four phases to the business or economic cycle. These include contraction, trough, expansion and peak cycles. The peak phase of the business cycle is followed by the contraction phase. At the end of the peak phase of the business cycle, interest rates are high and the unemployment rate is low. When the economy moves through the contraction phase or a slower growth period, interest rates start to decline as the unemployment rate increases. When unemployment rates increase, beef demand tends to soften or even decrease. The central bank’s purpose is to balance the goal of price stability (inflation) and healthy employment levels.

Let’s look at two examples. The U.S. Federal Reserve’s interest rate peaked in June 1981 at 19.1 per cent. At this time the unemployment rate was at 7.6 per cent. The economy started to contract and during the major recession of 1982, gross domestic product (GDP) was negative each quarter. The jobless rates started to increase in the fall of 1981 and peaked in December 1982 at 10.8 per cent. By December 1982, the U.S. Federal Reserve’s benchmark rate was at nine per cent. The U.S. Federal Reserve decreased its interest rate as the jobless rate increased through the recession.

In July 2007, the Fed Funds rate was at 5.26 per cent which was the high before the Great Recession. At the same time, unemployment was at 4.7 per cent. The main recession occurred from the fourth quarter of 2008 to the first quarter of 2009. In October 2008, the Fed lowered its policy rate to zero per cent. Unemployment peaked at 10 per cent in November 2009. We all remember how the cattle market behaved during the Great Recession.

It takes 12 to 18 months for interest rate adjustments to work through the economy. There’s a time lag and don’t forget this. The U.S. Federal Reserve’s benchmark rate in August was 5.5 per cent. At the time of writing this article, financial analysts were expecting an interest rate cut of 25 basis points on September 18. U.S. jobs data for July showed that U.S. employers hired only 114,000 Americans. This was lower than the 12-month average of 225,000 positions. From July 29 to August 5, the live cattle futures dropped nearly $10 as the industry was bracing for a poor jobs report.

Job growth will slow even further in upcoming months, causing beef demand to soften or even decrease. Lower demand will result in lower cattle prices. Average U.S. and Canadian consumers are cutting back on spending after 2.5 years of elevated inflation and one year of higher interest rates. On August 1, Intel announced it was laying off 15,000 employees just before the negative jobs report on August 3. The U.S. and Canadian economy will go through a period where unemployment levels increase. The Canadian economy lost 41,000 full-time jobs in the second quarter of 2024. McDonald’s sales slowed in the second quarter of 2024 and this is a leading indicator of the economy and beef demand.

Another point to consider is that U.S. and Canadian cow-calf producers start expanding the herd when interest rates are at the roof. Back in 1981, U.S. cattle producers expanded the herd until 1983. The U.S. beef cow slaughter during June 2024 was 227,900 head, the lowest since July 2017. The U.S. cattle herd was expanding from 2016 through 2019. Cattle prices have been at or near historical highs for nearly two years, so the timing is correct for expansionary behavior. However, I’m only expecting a year-over-year increase in the calf crop in 2026. It takes a couple of years, after the cow slaughter decreases and heifer retention begins, for the calves to come on the market.

In conclusion, the unemployment rates on both sides of the border are expected to increase. The central banks will respond by decreasing their benchmark interest rates. Higher unemployment levels tend to result in lower beef demand as consumer spending decreases. History tells us that cow-calf producers expand the herd when interest rates reach the highs.

The post Cattle market transitioning to expansion appeared first on Canadian Cattlemen.

I’ve received many calls from cattle producers over the past couple of weeks asking if they should be aggressive on barley purchases during harvest. Therefore, in this article, I’m going to discuss the Canadian and U.S. feed grain outlook for the 2024-25 crop year. Feeding margins are quite snug given current yearling prices. The cattle industry is banking on lower-priced grains which will be supportive for feeder cattle. 

RELATED: Feed Weekly: More grain to enter feed markets

Canadian farmers seeded 6.386 million acres of barley this past spring according to Statistics Canada. Using a traditional abandonment rate and yield of 71 bu./acre, production has the potential to finish near 8.9 million tonnes, unchanged from last year and similar to the five-year average. Total supplies, which includes the carry-in stocks, are estimated at 9.6 million tonnes, down from the 10-year average of 10.2 million tonnes. Exports for the 2024-25 campaign will likely finish around 2.3 million tonnes due to the stronger demand from China. Australia’s exports will be lower in 2024-25. China tends to make their purchases during August which sets the price structure for exports for the total crop year. 

We’re forecasting 2024-25 barley carryout near 1.3 million tonnes which is up from the 2023-24 ending stocks of 609,000 tonnes and similar to the 10-year average figure of 1.2 million. The reason we have domestic feed usage at 4.9 million tonnes is that we’re expecting 3.5 million tonnes of U.S. corn to trade into Western Canada. Imports of U.S. corn during the 2023-24 crop year will likely just finish under three million tonnes. 

U.S. corn production is expected to finish near 15.1 billion bushels, marginally lower than the 2023 output of 15.3 billion bushels but sharply above the five-year average of 14.4 billion bushels. Total corn supplies are expected to reach 17 billion bushels, up nearly 700 million bushels from the five-year average. The market will function to encourage demand. Without going into details, the corn carryout will likely finish near 2.1 billion bushels, up from the 2023-24 ending stocks of 1.89 billion bushels and above the five-year average of 1.8 billion bushels. 

A simple rule of thumb is that if the corn carryout is above the five-year average, corn prices drop to the five-year lows. In the 2019-20 crop year, corn futures traded in the range of $3.50-$4/bushel. Lethbridge barley was trading from $230-$260/tonne delivered. We expect to see aggressive offers of U.S. corn into Alberta once the U.S. corn harvest is in full swing. 

Another caveat to consider is Western Canada will likely have a large volume of feed wheat. In past years, milling wheat traded into feed channels but in 2024-25 there will be about six million tonnes of feed wheat production in Western Canada. This will be due to sprouting or fusarium. This must saturate domestic feed demand or trade at very low prices to South Korea at similar values to U.S. corn. There are only a couple of possible homes for this wheat offshore. 

In conclusion, we’re expecting about 3.5 million tonnes of U.S. corn to trade into Western Canada. There is potential for a large volume of actual feed wheat production. The U.S. corn carryout will finish above the five-year average causing barley and corn prices to trade near five-year lows. Chinese demand will set the price floor for barley in the non-major feeding regions of Western Canada. This feed grain environment is supportive of feeder cattle prices throughout the fall and winter.

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• READ MORE: Klassen: Buyers step back on feeder cattle due to bird flu

Consumer spending on food products was higher than expected during January. Total actual U.S. grocery store sales during January 2024 were down five per cent from December 2023 but up 2.8 per cent from January 2023. Actual sales at food services and drinking places during January 2024 were down 9.8 per cent from December but were up six per cent from 12 months earlier. Seasonally, consumer spending on food makes a seasonal low during January and February. Spending increases during March and April before making a seasonal high during June and July.

Consumer spending comprises 66 per cent to 70 per cent of U.S. GDP. A one per cent increase in consumer spending equates to a one per cent increase in beef demand. The two are highly correlated. During the fall of 2023, we were expecting the U.S. economy to experience slower growth in the first half of 2024. U.S. GDP came in at 4.9 per cent during the third quarter of 2023 (quarter-over-quarter, seasonally adjusted annual rate) at which time the fed cattle market was trading near historical highs. U.S. GDP during the fourth quarter of 2023 was 3.3 per cent. The cattle market softened accordingly as consumer spending eased.

Projections during the latter part of 2023 had U.S. GDP coming in around 1.5 per cent to two per cent during the first and second quarters of 2024. This has changed. Current data reflects that U.S. GDP during the first quarter of 2024 will reach over four per cent and possibly be as high as 4.5 per cent. Demand projections for the second quarter of 2024 appear to be similar to the third quarter of 2023 when the cattle market was making historical highs.

I want to draw attention to two charts (see below). U.S. spending at restaurants and other drinking places is projected to run at six per cent to eight per cent during the first half of 2024. At this stage, we’ll likely see softer spending in the latter half of 2024 with projections of two to three per cent over year-ago levels.

Secondly, we like to follow the U.S. University of Michigan Consumer Sentiment Index. This index reflects how consumers feel about their financial situation and the expectations for the economy over the short and longer term. This is a good indicator of spending behaviour forecasts over the next six months. The February 2024 reading came in at 79.6, up from the June 2023 level of 64.4 and up from the February 2023 reading of 67. Consumers are becoming more optimistic about their situation. Keep in mind that U.S. equity markets are trading near historical highs and unemployment levels remain near historical lows.

In conclusion, U.S. GDP forecasts have been adjusted upward due to stronger than expected economic data. Consumer spending has exceeded expectations during January, which is typically a seasonal low. We expect consumer spending at restaurants to increase during the spring and summer. U.S. consumer sentiment has been percolating higher since making lows in the fall. This supports consumer spending and GDP projections for the second quarter. After this stronger economic growth in the first half of 2024, consumers will likely pull in the reins in the latter half. The cattle market will follow consumer spending behaviour, just like it did last year. Notice the downdraft in restaurant spending in the latter half of 2023. This correlates with fed cattle prices. As spending decreased in the latter half of 2023, fed cattle prices also trended lower. Look for a similar pattern in 2024.

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The constellation of prices is when the deferred live cattle futures behave and move in tandem with the nearby contract. There is a difference between this behaviour in the cattle and grain/oilseed markets because cattle are theoretically non-storable. Understanding this behaviour can be extremely valuable when deciding to forward price fed cattle. It’s also valuable for backgrounders and cow-calf producers when buying price insurance.

In the grain/oilseed futures markets, the price spread between the nearby contract and the deferred contract is largely determined by storage and interest costs. When the nearby contract expires, the function of the next contract month is to move to where the previous month expired. This is often referred to as the collapse of the carrying charge. Traders will often say the carrying charge is coming out of the market. A wider spread between the nearby and the deferred months is reflected by a wider basis. In theory, a spread should not be wider than the full cost of storage and interest, but it does happen on occasion. A wider basis is viewed as bearish in the grain markets. This is con- fusing for many farmers. When the deferred contract is higher, farmers think the market should strengthen but it actually signals the reverse. The market is telling the farmer to sell now for deferred delivery. The market does not want your product now but later. 

In contrast, a narrower spread between the nearby month and the deferred month in the grain/oilseed markets results in a stronger basis level. A narrow basis is typically viewed as a bullish signal for the futures market. In the grain and oilseed markets, when the nearby contract is premium to the deferred, the market is telling the farmer to sell now for immediate delivery instead of storing the crop. 

The fed and feeder futures contracts are unique because cattle are theoretically non-storable. Fed cattle can be held for a certain amount of time but eventually must move to market. Feeder cattle can be held for a longer period, and this is referred to as semi-storable. For example, a 500-pound calf can be held until it is 700 or 800 pounds if the owner chooses. 

In this article, I’m going to refer to the chart below showing the December 2023 live cattle futures and the April 2024 live cattle futures. The supply and demand during the final quarter of 2023 were significantly different from the supply and demand for the first quarter of 2024. However, when the December 2023 live cattle futures started to trend lower in late September, the April 2024 live cattle contract moved in tandem with the December contract. Producers who had fed cattle that would be market-ready in January, February and March 2024 were confused by the price behaviour. I received calls asking why the April 2024 contract was trading in tandem with the nearby October and December contracts. Shouldn’t prices be higher later in the spring compared to the fall of 2023? This is where the misunderstanding comes into play. 

The nearby live cattle contract is price discovery for the overall live cattle complex. The spread between the December and the April live cattle futures reflects how the supply and demand changes between the two time periods. 

For example, U.S. GDP during the third quarter of 2023 was 5.2 per cent (quarter- over-quarter seasonally adjusted annual rate). U.S. GDP for the fourth quarter of 2023 was only expected to be two per cent and first quarter GDP was expected to fall to 1.5 per cent. Strong demand in the third quarter was actually lifting the deferred months to the higher levels. Notice the December 2023 and April 2024 live cattle contracts made their highs at the same time. The fed cattle supplies were expected to be tighter in April compared to December, thus the April 2024 live cattle futures were trading at a $5-$8 premium over the December 2023 live cattle contract. The rally in late summer of 2023 was very much a demand feature. As demand started to fade, the overall complex started to trend lower. 

Given this knowledge, it was prudent to be more aggressive in forward contracting for the fourth quarter of 2023 and the first quarter of 2024. Of course, the live cattle are the feeder cattle futures five months forward. Backgrounders and cow-calf producers need to watch the live cattle for the timing of purchasing their price insurance or forward contracting their calves and yearlings.

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There are two main characteristics of demand for the cattle and beef market. First, beef demand is inelastic. In simple terms, a small change in supply has a large influence on the price. Every producer can confirm this. Second, a one per cent increase in consumer spending equates to a one per cent increase in beef demand. U.S. consumer spending is 66-70 per cent of U.S. GDP or gross domestic product. This is the measurement of the U.S. economy.

Below is a chart of the U.S. calf crops from 2009 through 2024. After the sub-prime recession of 2009, the U.S. cattle producer continued to contract the cattle herd until 2014. During the darkest phase of the recession, which occurred in the final quarter of 2008, U.S. GDP was negative 8.4 per cent.

The live and feeder cattle futures made a high in October of 2014. U.S. GDP during the second quarter of 2014 was 5.5 per cent and 2014 third-quarter GDP was five per cent. Beef production continued to decline in the first half of 2015. However, U.S. GDP was only 3.8 per cent in the first quarter of 2015 while second-quarter GDP was 2.3 per cent. Despite the lower beef production in 2015, live and feeder cattle futures did not move higher because of waning beef demand. The economy had topped out and so did beef demand.

The COVID recession of 2020 resulted in lower prices which caused the U.S. cow-calf producer to contract the herd. The Canadian data mirrors the U.S. but on a smaller scale. The U.S. and Canadian cow-calf producers didn’t receive the memo regarding monetary and fiscal stimulus that occurred during and shortly after COVID. The cow-calf producer didn’t realize the economy was in an aggressive expansion phase during 2021 and 2022. They were basing decisions to contract the herd on the poor financial returns from 2020.

From 2020 through October 2023, the U.S. economy was in an aggressive economic expansion phase due to a surge in consumer spending. At the same time, the cow-calf producer was contracting the herd. Very simply, lower supplies and stronger demand results in higher prices. The reverse will occur in 2024.

U.S. 2023 third-quarter GDP will likely finish around five per cent. U.S. fourth-quarter GDP is only expected to be 2.3 per cent. The economy has topped out. Despite lower beef production in the first half of 2024, cattle prices will not likely move higher due to easing demand. Interest rates are at 40-year highs and consumer confidence is decreasing. Restaurant traffic is below year-ago levels.

The U.S. beef cow slaughter for 2022 was just over four million head. For 2023, the beef cow slaughter is expected to finish at 3.5 million head. The 500,000 head year-over-year decline in the beef cow slaughter is sufficient to result in a year-over-year increase in the 2024 calf crop.

In 2024 and 2025, we will see consumers pull in the reins on spending. At the same time, we’re anticipating a year-over-year increase in the calf crops. Cattle-on-feed reports are irrelevant when the cattle market is at extreme highs and extreme lows because the market becomes highly sensitive to demand. The livestock price insurance program becomes impossible to use in a declining market. The insurance premiums are based on option premiums for the deferred feeder cattle futures. In a declining market, the futures lead the cash market lower so producers won’t be able to use the program to lock in a profit.

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