Cattle producers facing a pandemic market

Options include being prepared to background steers, keep replacement heifers

Over the past couple of weeks I’ve received many calls in regards to the market situation for fed and feeder cattle. The conversation usually starts with “What should I do?” This is a very difficult environment, to say the least.

The shuttering of one major Alberta beef plant (as of late April) and reduced slaughter capacity at the second has caused fed cattle supplies to become backed up at the finishing feedlot. Alberta and Saskatchewan feedlot inventories are nine per cent above the five-year average.

Earlier in spring, I mentioned there was a sharp year-over-year increase in market-ready supplies slated to come on the market during the second quarter. This backlog has exasperated the situation. Needless to say, buying interest for yearlings has softened because the major plants on both sides of the border are not showing bids in the deferred positions so that finishing feedlots can lock in replacements. Calves and grass cattle have experienced limited slippage over the past month. Buyers are hoping that once these cattle come on the yearling market next fall or the fed market next winter, the COVID-19 pandemic should be history.

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At the same time, the feed grain outlook for the summer and fall looks quite bearish, which is also underpinning the lighter weight categories.

Considerations

I thought this would be a good time to discuss the individual situations of various cattle producers. Sometimes taking time to write down or discuss various alternatives helps clarify the situation and helps you sleep at night.

First, many small to mid-size finishing operations have cattle on feed ready to come on the market and have bought price insurance earlier in winter for these cattle. I want to emphasize that the producer wants to lift or trigger their insurance payment only once the cattle are actually priced. Don’t trigger the payment and then hope the fed cattle market bounces. There are other ways to trade the volatility in the cattle market. When you lift your hedge and then hope for a bounce in the fed cattle market, it usually works against you. This is just rolling the dice.

Many backgrounding operators also have price insurance on their yearlings that should be coming on the market at this time. Similar to the finishing feedlot, plan to time the triggering of the price insurance the same week you’re selling the yearlings.

I’ve also received many calls from producers who have backgrounded cattle and don’t have any price insurance. They’re planning to stretch the feeding period on these fall-placed calves. When I make some rough calculations, the backlog of market-ready supplies in finishing feedlots will only be alleviated in late summer. These producers holding onto yearlings will have to be prepared to hold a long time. As of late April, the December live cattle futures were at $98 and using the current exchange rate and an average basis, this only results in a fed cattle price of $126. This means an 850-pound steer in central Alberta needs to be priced in the range of $140 to $145 in August. Currently, mixed steers in central Alberta are around $150 so you may not be better off longer-term.

Finally, we have the cow-calf producer with various weights of feeder cattle that will come on the market during the fall. The price insurance is expensive because the feeder cattle futures are at lower levels. While producers would normally hold onto to these cattle into the fall, they want to start looking at their options.

Feed grains are expected to trade near five-year lows because of the year-over-year increase in U.S. corn and Canadian barley crops. If we don’t see a minor recovery in the yearling market by October, the producer may look at backgrounding these cattle over the winter to achieve the higher price in 2021. The input costs will be lower and depending on the feeder cattle futures, you will likely have a better opportunity to buy price insurance on these cattle. I’ve also mentioned in past issues that this is likely a year to retain a few more heifers. You don’t want to sell your cows given the lower prices but this is the year to start the expansionary phase for your herd. Low prices are followed by high prices. Keep this in mind.

Governments and central banks are using every tool possible to help the lower-income individual survive the COVID-19 pandemic. It will likely take a year before beef demand returns to normal given the high unemployment rates, low consumer confidence and the sharp drop in disposable income. All cattle producers need to be realistic with their price expectations over the next 12 months. We’re only at the beginning of this recession. Economic growth will only move into positive territory in four to eight months. Therefore, it may be some time before fed cattle and yearling prices return to levels that we saw during 2019.

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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