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Expect volatility in the cattle market

Market Update with Jerry Klassen: High feed barley prices mean a drastic increase in cost per pound of gain

Alberta feedlots were selling fed cattle at $136 f.o.b. the feedlot in mid-November, which was relatively unchanged from average prices in October. The market has held due to steady demand from south of the border.

Alberta packer bids have come in at a $3 to $5 discount to U.S. packers over the past month. Western Canadian feedlots are contending with a severe backlog of market-ready supplies. However, feedlots are more current south of the border, especially in the U.S. Southern Plains.

Yearling prices have come under pressure over the past month largely due to rising feed grain prices. The February and April live cattle futures dropped $8 to $10 during October, which caused the yearling market to decline by a similar amount.

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Calves made seasonal lows during October. I always tell cow-calf producers not to sell during October while at the same time, I advise feedlots to increase ownership. The calf market is now starting to percolate higher but additional strength will depend on August 2021 live cattle futures.

I’m estimating there are about 70,000 head still on the fed cattle set-aside program in Alberta and Saskatchewan. As of Oct. 31, there were about 155,000 head of market-ready cattle backed up in western Canadian feedlots. Because of the set-aside program, this will not change over the next few months. We haven’t seen a significant increase in the domestic slaughter or in weekly fed cattle exports to alleviate the burdensome supply situation. In the U.S., market-ready supplies during November will actually drop below year-ago levels. The backlog in the U.S. has been alleviated for the time being. Therefore, I’m expecting stronger fed cattle prices in the U.S. and Alberta through November and December.

Different story in the New Year

The situation changes in January. In the U.S., January through May 2020 feedlot placements were down about one million head from 2019. During the spring, the U.S. cow-calf producer held back on sales. We now find U.S. feedlot placements exceeding year-ago levels. This is going to result in a burdensome fed cattle supply situation during the first quarter of 2021. Given processing constraints in the plant fabrication area, we could see a backlog in the U.S. resurface during February and March. Plants can only process a limited number.

The outlook for beef demand has improved over the past month. The October U.S. unemployment rate came in at 6.9 per cent, down from the September reading of 7.9 per cent. Canadian employers added 83,600 jobs in October, causing the unemployment rate to come in at 8.9 per cent, down marginally from the September number of 9.0 per cent. The economy continues to recover from the COVID pandemic and it appears that a vaccine will be available during the first quarter of 2021. Restaurant traffic has been running about 50 per cent of normal but this should improve over the next few months.

The most important factors influencing the feeder market are feed grain prices and the expected fed cattle price when the animal is finished. There is no signal that the rally in the barley market is over. Feed barley in southern Alberta is trading in the range of $275/mt to $285/mt delivered for January through March positions. Many feedlots have been caught off guard. The cost per pound of gain has increased drastically since August and many feedlot operators are expecting barley to strengthen by an additional $10/m to $30/mt; therefore, they have figured in these costs when purchasing replacement cattle.

Another factor to consider is that the industry has experienced significant equity erosion in the feedlot sector over the past year. Many cattle feeders that place cattle in a custom feedlot are buying 30 to 40 per cent fewer calves this fall. Unless feedlot operators can forward-contract or hedge at profitable levels, they cannot afford to take the risk this year. It’s a very difficult financial situation for many feedlot operators and the cow-calf producer needs to keep this in perspective.

The live cattle futures are expected to make seasonal highs in late November and early December. This may allow feedlot operators to lock in a small margin on current placements. However, after January the fed cattle market is expected to grind lower and the barley market is expected to trend higher. This will cause feeder cattle prices to trend lower as well. Cow-calf producers and backgrounding operators should be buying their price insurance for January through June marketings in December. One bright spot is the market for lighter calves. The grasser market next spring is expected to be red hot again because we’ve seen two consecutive year-over-year declines in the calf crop.

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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