Feedlot operators have had a very strenuous spring and summer. Margins have been hovering in negative territory while feed barley prices have been percolating higher. Feeder cattle prices are actually higher than year-ago levels despite the strong feed grain prices and a year-over-year increase in the U.S. calf crop. The Canadian dollar has been trading in a sideways pattern but interest rates are on the rise.
In addition to adverse market conditions, political trade-rattling from south of the border has producers on pins and needles. There are concerns that some form of protectionist measures could be implemented at any time.
Drier conditions have engulfed much of the Prairie region but this hasn’t changed the marketing schedule for cow-calf producers. Yearling numbers outside finishing feedlot operations are slightly below year-ago levels in Western Canada. Canadian beef demand appears to be stagnating while higher disposable income in the U.S. has enhanced retail and wholesale beef prices. Packers are having a fairly good year but this hasn’t trickled over into the feedlot sector.
In early September, Alberta packers were buying fed cattle in the range of $238 to $240 on a dressed basis, down about $5 from a month earlier. Feedlot breakeven pen closeout values are hovering around $250 so margins are struggling in red ink. Feedlots have not experienced significant equity buildup like last year so there is a cautious tone when purchasing replacements. Despite the year-over-year increase in cattle-on-feed inventories in Alberta and Saskatchewan, market-ready supplies are expected to drop below year-ago levels in September and October.
The U.S. is in a similar situation. The industry has experienced a very abnormal marketing pattern from ranchers in the Southern Plains. Placements actually dropped below year-ago levels during March and April. U.S. auction market receipts may not drop later in fall despite larger placements over the past two months. The trade is gearing up for a sizeable year-over-year increase in 2019 second-quarter beef production.
Bullish for barley
The feeder market remains firm heading into fall. As of early September, 850-pound steers were trading near $200 in central Alberta while 750-pound steers were closer to $210. It’s important to realize yearling prices are $5 to $10 above a year ago while barley prices are up $50 to $60 per tonne. We haven’t seen significant equity buildup in the feedlot sector this year; therefore the feeder market may be vulnerable to higher feed grain prices.
Statistics Canada’s crop survey was bullish for barley prices. The average Canadian yield came in at 63.1 bushels per acre, down from last year’s yield of 69.4 bushels. Despite the year-over-year increase in seeded acreage, Canadian barley production is expected to come in at 8.0 million tonnes, up marginally from the 2017 crop of 7.9 million. It’s important to realize that world barley supplies will drop to historically low levels during the 2018-19 crop year which will result in a year-over-year increase in Canadian exports. Therefore, the function of the barley market is to ration demand through higher prices.
It looks as if 85 per cent of the Canadian wheat crop will grade in the top two milling categories so we won’t see much wheat move into feed channels. Therefore, Alberta and Saskatchewan will have to import about 1.5 million tonnes of U.S. corn to make up the shortfall in feed grain inventories.
I’m expecting fed cattle prices to ratchet higher during the fall and then stagnate over the winter. Feeder cattle prices will likely make seasonal highs in September and then start to drift lower as corn and barley prices trend higher. There is serious downside risk for feeder cattle prices in late winter and early spring. If feedlot operators are struggling to secure feed supplies, they won’t be anxious to buy fresh replacements.