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Calf prices will be sideways into 2020

Market Update with Jerry Klassen: Both the U.S. and Canada produced smaller calf crops in 2019

Alberta packers were paying $142 to $144 on a live basis in mid-November, relatively unchanged from last month’s average price. While Alberta prices have traded in a sideways range, fed cattle values south of the border have been percolating higher.

In Nebraska, fed cattle were trading in the range of $114 to $116, up from the October average of $110. Basis levels in Alberta have deteriorated due to the sharp year-over-year increase in market-ready supplies. Carcass weights are quite high and margins have been hovering in negative territory over the past six months.

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This environment in the feedlot sector has weighed on the feeder market. Higher-quality steers in central Alberta were valued at $185, down approximately $10 from the October average. Calves have also traded in a sideways fashion, but lighter-weight classes are about $4 to $8 higher compared to last month.

In southern Alberta, Simmental-based steers weighing 510 pounds were quoted at $230 in mid-November while black heifers were valued at $195. Pen conditions have been rather poor for bringing in replacements across the Prairies, which has also contributed to the lower buying interest for calves. Alberta feed barley prices have rallied about $15/mt over the past month due to the delayed harvest. At the same time, supplies of calves under 500 pounds are somewhat tighter than year-ago levels due to the year-over-year decline in the 2019 calf crop. There is a fair amount of uncertainty moving forward and the cattle markets have potential to be quite volatile over the winter.

The adverse weather during the summer and fall resulted in an abnormal marketing schedule for feeder cattle. U.S. and Canadian feeder cattle placements in the lighter-weight categories were sharply lower than year-ago levels during the summer. This will result in lower market-ready supplies in the first quarter of 2020. I’m projecting a sharp year-over-year decline in first-quarter beef production followed by a year-over-year increase during the second quarter of 2020. As it looks now, the fed cattle market will move from one extreme to another in the first half of 2020.

Lower interest rates

The U.S. Federal Reserve lowered interest rates by 25 basis points at their Oct. 30 meeting. This was the third downward adjustment since July. A lower interest rate environment is somewhat bullish for commodities and specifically for fed cattle for two main reasons. Lower rates enhance consumer spending, which increases beef demand. Secondly, we may be heading into a significant inflationary environment, which causes cattle prices to strengthen. The managed-money funds have been a net buyer of nearly 70,000 live cattle futures contracts from Sept. 17 through Nov. 5. The futures market is leading the cash market higher into the first quarter of 2020.

As of late November, the February and April live cattle futures were trading near contract highs. Packers have been more aggressive in the cash market by offering attractive basis levels for their first-quarter requirements. Feeding margins are expected to improve through the winter.

Cattle-on-feed inventories in Alberta and Saskatchewan were estimated at 724,200 on Oct. 1 according to CANFAX. I’m estimating that these inventories will reach up to 1.1 million head on Jan. 1 2010. The yearling market tends to be the strongest in the early-fall period when cattle on feed inventories are at seasonal lows.

From January through March, feedlot inventories are at seasonal highs so demand is not as strong as in the fall. When feedlots are full to capacity, the yearling market will not rally. Secondly, Statistics Canada’s semi-annual cattle on feed report showed that feedlots were carrying larger numbers of calves under one year old as of July 1. This may also contribute to lower yearling demand over the winter. Backgrounding operators need to be aware of three main factors during the winter. Second-quarter beef production will be extremely burdensome and feedlot operators know this — feedlot inventories are at seasonal highs. Finally, barley prices tend to percolate higher during the spring when road bans come into play and farmers are busy seeding. While feeding margins are expected to improve, don’t count on this translating into higher yearling values.

Calves are expected to trade sideways over the winter. Keep in mind these replacements will only be ready in the second and third quarters of 2020. At the time of writing this article, calves under 500 pounds were actually quite strong. The U.S. calf crop for 2019 is expected to be 36.3 million head, down from the 2018 crop of 36.4 million head. The Canadian calf crop for 2019 is projected to come in at 4.2 million head, down from 4.3 million head last year. After four years of aggressive expansion, the calf crops are experiencing year-over-year contraction on both sides of the border. Yearling supplies next fall are expected to be quite snug, which will spill over into higher calf values. Cow-calf producers know from past history that you have to be contrarian. If you’re thinking of liquidating or downsizing the herd, give it one more year.

About the author

Columnist

Jerry Klassen

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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