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Be ready when feeder cattle prices bounce back in 2010/2011

Feeder cattle prices in Western Canada have been percolating higher over the past month. Steady buying interest from finishing feedlots along with lower available numbers has set a positive tone. I’m advising cow calf producers that this is the time to start rebuilding the herds. The US and bulk of Canadian industry appears to be in liquidation mode and it is prudent to go against the tide. When feeder cattle prices move back up to record highs, cow calf producers who start to build up the herds now will be able to take advantage of the stronger market in 2010 and 2011.

The contraction on both sides of the border will cause beef production to decline in 2009 and 2010. US Cow calf producers will start holding back heifers in 2010 and 2011 thereby reducing available feeder numbers. We will see lower beef production and could cause calf prices to move back up to historical high prices longer term.

The strength in the December and April 2010 live cattle futures is supportive for local feeder cattle prices over the next four to six months. The December live cattle futures have been trading at the $90 area and with the weaker Canadian dollar, feedlot operators in Southern Alberta are expecting live cattle prices to trade in the range of $95 to $100. Higher potential live cattle prices in the fourth quarter are driving up light-weight feeders.

It is also important to note the ongoing drought in Texas. Feeder cattle are moving off small grain pasture sooner than anticipated. Keep in mind the USDA reported the number of cattle on small grain pasture was the smallest since 2001. US feedlots in the southern plains are going through a very difficult period. Feeding margins are negative 200 to 250 per head and the problem is that this may continue for the next three months. Despite these negative returns, feeder cattle prices have held up due to strength in the deferred live cattle futures.

The USDA recently estimated US corn acres at 86.0 million, very similar to last year. At this time, the feedgrains market feels comfortable with this number but the market will be sensitive to weather during the growing season. Barley acres are expected to be down five to 10 percent which will be supportive for new crop prices.

The cattle industry is in the middle of a contraction phase. By 2011, the industry will start to move into expansion mode. Heifers will be held back for breeding thereby tightening the feeder supply even further and causing lower overall beef production. The economy is expected to start turning around in 2010 and there will be major shift in demand as incomes start to increase.

FED CATTLE

Weakness in the Canadian dollar continues to support local fed cattle prices. Steers were trading in the range of $89 to $90 in early March. Prices in the US southern plains were holding value at $82, which is very similar to a month earlier. The market is contending with lower available market ready supplies, which is supportive. Available numbers are expected to increase in April but the demand is also expected to improve during this time. Wholesale prices have come under pressure because demand for higher end cuts is down sharply. However, competition from pork will be down in the second quarter due to lower production. The retail market for pork and beef appears to be at levels where we are seeing demand increase. Earlier in winter, I thought we might see the fed cattle market trend lower in the April through June time-frame. Now that the demand appears to be stabilizing, the downside may be limited from the current levels.

Inflationary policies of the US and Canadian governments will keep the loonie under pressure.

The fiscal deficit, the current account trade deficit, and contracting GDP are all factors weighing the exchange rate. The US dollar is still viewed as the safe haven for world investors and from a historical perspective; it would not be uncommon to see further strength in the greenback. The US dollar is still near historical lows, despite the small upward trend since October of 2008.

Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For questions or comments, he can be reached at [email protected]or 204 287 8268.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.

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