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Cow-calfers and backgrounders should hold off

Market Update with Jerry Klassen: Keep lighter calves from the 2020 crop for as long as you can

Feed grain prices have been the largest factor influencing yearling and calf prices over the past couple of months. As of mid-January, feed barley was trading in the range of $275/mt to $285/mt delivered in the Lethbridge area while feedlots in the Red Deer region were making purchases from $265/mt to $272/mt delivered. Barley prices have rallied $40/mt to $50/mt over the past couple of months and there is no sign this rally is over.

In mid-January, mixed steers weighing 900 to 950 pounds were quoted in the range of $165 to $175 in central Alberta, down about $5 to $10 from 30 days earlier. Steer calves in the same region weighing 500 to 525 pounds were trading from $215 to $220, also down $5 to $10 from the previous month.

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Feedlot margins are once again struggling in red ink despite the higher fed cattle market. Alberta packers were buying fed cattle in the range of $145 to $147 during the second week of January, up $7 to $8 from the second week of December. Southern Alberta feedlot break-even fed cattle prices for January and February are in the range of $151 to $153. Cattle-on-feed inventories are tightening south of the border but there is still a burdensome situation in Western Canada.

Steer carcass weights in Alberta are about 25 pounds to 30 pounds above year-ago levels, whereas in the U.S., steer carcass weights are only 10 pounds above last year. Beef demand in the short term is uncertain due to the COVID-19 pandemic. so wholesale beef prices are under pressure. Canadian provinces have enhanced personal and business pandemic constraints, while we haven’t seen significant changes in the U.S. COVID-19 protocols. Vaccinations should be widespread by April which should cause beef demand to resume some type of normalcy.

Lagging demand

Seasonally, the yearling market softens during January through March. Most feedlot operators are carrying sufficient numbers at this time of year so the market is lagging demand. Secondly, the yearlings that come on the feeder market during the first quarter will be ready for processing in the summer months. The August live cattle futures have recently traded at $5 discount to the April contract. As of mid-January fed cattle forward contracts for July and August reflected a price of $146 to $148 while break-even prices are range from $155 to $157. Therefore, it’s hard to justify higher prices for yearlings at this time. Feedlots are also factoring in further upside in the barley and corn markets, which is contributing to the softer tone.

Calves that now weighing in the 600- to 800-pound range will come on the fed market from August through October. There are two factors to consider for these cattle. As of mid-January, new-crop barley in southern Alberta was trading in the range of $240 to $250/mt. There is a $30/mt inverse between new- and old-crop barley prices. For the final two months of feeding, these cattle will have a lower cost per pound gain. Secondly, the market outlook for fed cattle is much brighter for September and October. The October live cattle futures are trading at a $3.50 premium to the August contract and there is likely further upside potential. U.S. third-quarter beef production is expected to come in around 6.85 billion pounds, down about 250 million pounds from the third quarter of 2020. The U.S. will likely be vaccinating one million people per day by the summer and widespread vaccinations will also be available in Canada. These calves weighing 600 to 800 pounds may be weighed down by softer yearling prices in the short term. However, backgrounders and cow-calf producers should hold off as long as possible when marketing these cattle.

Lighter calves

Calves weighing under 600 pounds are one bright spot in the feeder market because these cattle will come on the fed market during the final quarter of 2021 or first quarter of 2022. Cow-calf producers and backgrounders have two options for these cattle. The lighter ones can be sold as grassers and come on the yearling market in the early fall of 2021, or they can background the animals with controlled weight gain and sell in April or May of 2022. Again, the longer you hold the cattle, the better off you will be.

I’m looking for grassers to trade at fresh 52-week highs this spring; yearlings during the fall are expected to trade at fresh two-year highs. The market will be adjusting to three consecutive year-over-year declines in the U.S. calf crop. This will translate into a year-over-year decline in fourth-quarter beef production of nearly 400 million pounds. At the same time, the fed cattle market experiences seasonally strong demand in the final quarter of the year. I’m fairly bullish on the December live cattle futures although there will be severe volatility in the short term.

Yearlings and calves of various weight categories have a different market outlook. It’s important that cow-calf producers and backgrounding operators are aware of the fed cattle market fundamentals for each quarter of the year. I believe the feed grain market has further upside, which will continue to influence the cost per pound gain.

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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