U.S. and Canadian cattle prices have been trading near historical highs over the past couple of months. Feedlot margins have been hovering in positive territory throughout the summer. Demand for yearlings and calves has been unprecedented as finishing operators reload for another round of feeding.
After consecutive years of financial struggles and drought, cattle producers are finally breathing a little easier. During August 2022, fed cattle prices in Alberta were hovering at $179/cwt fob the feedlot in southern Alberta. In August 2023, Alberta packers were purchasing at an average of $230/cwt. Similarly, higher-quality 800-pound steers in central Alberta were peaking at $250/cwt last year. As of early September, 800-pound steers were topping out at $350/cwt in the main feeding regions of Alberta.
The cattle herd on both sides of the border continues in a contraction phase and industry analysts are monitoring the cow slaughter and heifer retention behaviour for the first indication of expansion.
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Prices for beef cattle continue to be strong across the beef value chain, although feedlot profitability could be challenging by the end of 2025, analyst Jerry Klassen says.
When prices are at historical highs, the market functions to encourage expansion and ration demand. Expansion is easy to monitor but the demand equation can be more difficult. The demand curve for beef is inelastic. A small change in supply has a large influence on the price of beef and fed cattle. The largest factor influencing beef demand is consumer spending. A common rule of thumb suggests that a one per cent increase in consumer spending equates to a one per cent increase in beef demand. Consumer spending composes about 70 per cent of U.S. gross domestic product (GDP).
There are four stages in the economic or business cycle — contraction, trough, expansion and peak. Usually, cattle prices peak when the economy is also peaking. The recent recession occurred in the spring of 2020 due to COVID. Cattle prices have been trending higher since making lows in April 2020. There are now signs that beef demand is peaking.
The real GDP by quarter for Canada and the U.S. (see table above) shows we’re expecting the U.S. third quarter to finish near 4.0 per cent. It’s important to realize that some economic models have U.S. third-quarter GDP in the range of 5.0 to 6.0 per cent. Needless to say, it looks like the U.S. economy has reached the peak phase of the economic cycle. U.S. consumer spending will likely slow in the fourth quarter of 2023 and first half of 2024. It’s almost impossible for the U.S. to maintain quarterly growth of five to six per cent.
History tells us that U.S. cow-calf producers needs one year of historical high prices before expansion on a large scale. This occurred in 1980 and also in 2015. We often compare 2023 to 2014 but it’s also important to look back a bit further. The live cattle futures peaked in May 1979 and U.S. cattle herd expansion started in 1980 when interest rates were through the roof. The U.S. cattle herd was in expansion until 1982. More recently, live cattle futures peaked in October 2014 and herd expansion only started in 2015. The U.S. cattle herd expanded until 2018.
Feedlot margins favourable
Feeder cattle prices are at historical highs. Feedlot margins have been favourable and there is significant open demand as finishing feedlots reload for the winter. Finishing feedlots usually need one round of negative margins before feeder cattle prices start to trend lower. Many finishing feedlots have forward purchases of yearlings for the fall and they have decent margins on these cattle over the winter. When these finishing feedlots reload next spring with yearlings or backgrounded replacements, the margins will be negative on these cattle. The finishing lot will not be able to lock in a margin on them. Feeder cattle prices are expected to peak next spring and then start to slowly trend lower.
This past spring, U.S. farmers increased corn acres at the expense of soybeans. During spring 2024, we’ll likely see a decline in corn acres. The soybean market will function to encourage acreage. Cattle producers on both sides of the border will be facing higher feed grain costs in the summer and fall of 2024. This will contribute to the lower prices for feeder cattle in the fall of 2024.
It will be difficult for cow-calf producers or backgrounders to use the livestock insurance program to lock in a profit in a falling market. The livestock insurance program is based on the feeder cattle futures. The market will be anticipating herd expansion in the U.S. cattle herd in the fall of 2024 and into 2025.
Feeder cattle prices are expected to remain at or near historical highs through March or April 2024. Prices won’t fall apart but the highs will likely be in place. Next spring, those producers buying calves for grass or backgrounding need to be careful because margins on these cattle will come under pressure.
