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Today’s cash cattle market is deceiving

Market Update: It will be a different market in late 2018 compared to late 2017

It’s that time of year when most feedlot and backgrounding operations are running near full capacity and the focus turns to marketing. The live and feeder cattle futures had been quite volatile over the past month when this was written in late December, which can make cattle producers quite nervous.

While the futures market has softened, cash prices have held value. Alberta packers were buying fed cattle in the range of $150 to $153 in early December, which is up $2 to $3 from a month earlier. Feeder cattle prices have traded in a relatively sideways range. As of late December, Simmental-cross medium to heavier flesh steers averaging 810 pounds traded for $203 in central Alberta, which was unchanged from last month. Calves have remained firm through November and December with Charolais-cross steers averaging just under 700 pounds quoted at $217 in southern Alberta. Featherlight steers weighing 400 to 450 pounds traded from $265 to as high as $280 in eastern Saskatchewan.

Looking at the cash markets in Western Canada, one would think the market for fed and feeder cattle would trade sideways to higher during 2018; however, the futures market is providing a different picture.

What are the futures saying?

First, I’ve received many calls from producers asking why the feeder market is so strong. I always say that there are two main factors that drive the current feeder market. First, feedlot margins were quite favourable through 2017 with the exception of the past couple of months. Very simply, if there are three feedlot operators feeding 10 head of cattle and they make $250 per head, on the next round of feeding, each operator will want to feed 15 head. The problem is that there are still only 30 head available. This was the situation this past fall in Western Canada.

The next major factor influencing the feeder cattle price is the expected selling price when the animal is finished. In early November, the April live cattle futures made a contract high of $130 but fell to around $120 in mid-December. This strength in the April live cattle futures along with the equity buildup on the feedlot sector in 2017 drove the feeder market higher this past fall.

Now consider the following futures closes as of Dec. 12, 2017. The table at top shows the April live cattle futures contract closed at $119.625, while the October contract closed at $110.600. The October contract is trading at a $9 discount to the April contract. It’s interesting that the April 2019 contract closed at 113.200.

I always remind producers that the feeder cattle market is the live cattle market five months forward. The March feeder cattle will be sold as fed cattle in August. I want to draw attention to the forward curve on the feeder cattle futures. Notice the price structure is relatively flat for all of 2018. This can be deceiving because the live cattle futures are telling a different story.

If we take an average Alberta yearling price on an 850-pound steer at $202 and use a cost-per-pound gain of $1.05, the fed cattle break-even price in April is about $164. Given the current futures price, the Alberta fed cattle price is expected to be around $154 so it appears that feedlot margins on yearlings next April will be negative $150 per head.

Backgrounding operators who bought calves this past October have a higher probability of making a decent margin. If the yearling price remains relatively flat, margins will probably turn out to be about $50 to $80 per head. However, feedlot operators who bought calves for finishing in the fall of 2017 for the August 2018 fed cattle market are also going to be under water by $140 to $160 per head.

And then look at the August and September feeder cattle closes. The market for next fall looks as though cash prices will be similar to 2017. We have to remember, that next fall, feedlots will have experienced negative margins on unhedged cattle for an extended period. On top of this, the U.S. cattle herd continues to expand. The 2018 calf crop will be the fourth consecutive year-over-year increase of one million head or more.

It appears the August and September 2018 feeder markets are relatively overpriced. Feedlot margins will have hovered in red ink for an extended period and the market will be contending with a burdensome supply situation.

So for the fall of 2018, we’ll see the opposite environment of the past 2017 fall. Each cattle feeder will only need to buy 75 per cent of the volume purchased in 2017 and there will be additional supplies. Cow-calf producers need to brace themselves for this environment. During the fall of 2018, cash feeder prices could be trading $20 to $30 below current values.

It appears the August and September 2018 feeder markets are relatively overpriced. Feedlot margins will have hovered in red ink for an extended period and the market will be contending with a burdensome supply situation.

So for the fall of 2018, we’ll see the opposite environment of the past 2017 fall. Each cattle feeder will only need to buy 75 per cent of the volume purchased in 2017 and there will be additional supplies. Cow-calf producers need to brace themselves for this environment. During the fall of 2018, cash feeder prices could be trading $20 to $30 below current values.

photo: File

About the author

Columnist

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. Jerry 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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