The April 2024 live cattle futures have been trading near historical highs. As of early March, the contract was at $172.85/cwt. The live cattle futures are the feeder cattle futures five months forward.
While the April live cattle futures are making fresh all-time highs, the November feeder cattle futures have been trading around $220/cwt. The historic high on the feeder futures occurred during October 2014 when the market reached $245/cwt. The November feeder cattle futures are $20 shy from all-time high.
Feeder cattle futures do not move in tandem with the live cattle market because of the corn market. In October 2014 corn futures were trading in the range of $3.50 to $4.00/bushel. In March 2023, the nearby May corn was trading at $6.27/bu. while the December corn futures were trading at $5.67/bu. In addition to the higher futures, corn basis levels have been historically strong over the winter, resulting in lofty cash prices.
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It is a good time to review the outlook for feed grain complex come this fall. At this stage, the coarse grain complex looks burdensome. If average yields materialize in U.S. corn and Canadian barley, the feeder cattle futures have upside potential of $25-$30/cwt.
Planting outlook
At the USDA Ag Outlook Forum held Feb. 23-24, the government organization released its outlook for the 2023/24 crop year. U.S. farmers are expected to plant 91.0 million acres of corn in the spring of 2023, up 2.4 million acres from last year. Using a traditional abandonment rate and a trend yield of 181.5 bu./ac., U.S. corn production has potential to reach 383.2 million tonnes, up 34.4 million tonnes from 348.8 million last year. This would be the second-largest crop on record after 385 million in 2016.
The market will function to encourage demand through lower prices. U.S. ending stocks for the 2023/24 crop year are expected to finish near 48 million tonnes, up from 32 million in 2022/23 and above the five-year average of 45 million. If ending stocks are above the five-year average, the market will likely trade below the five-year average. December corn futures have potential to trade between $4 and $5 per bushel, down from the current level around $5.66.
The USDA is factoring in a year-over-year increase in exports at a time when Brazilian output is expected to reach a record high. Brazil has two corn crops. The first is seeded in the fall and harvested in January and February. The second is seeded after the soybean harvest in the last half of February and harvested in June. Brazil’s first crop corn is estimated at 25 million tonnes and the second crop at 100 million tonnes, for a total of 125 million tonnes. The exportable surplus comes from the second crop.
The world market will come under pressure in May and June, especially if the U.S. crop is developing under favourable conditions. Argentina is experiencing drier conditions but the crop is still expected to finish around 44 million tonnes, only down five million from last year. Argentine exports will be down by a similar amount.
In a normal year, the Ukraine will produce about 30-40 million tonnes of corn and export 20-28 million. The year-over-year increases in Brazilian and U.S. production makes the Ukraine production less important for world supplies. The Black Sea Grain Initiative, which allows Ukraine exports from the Black Sea, is expected to be renewed. Earlier this winter, there was uncertainty regarding Ukraine exports longer term. Political pressure from China and the West will likely cause Russia to cooperate with the U.N. negotiations. The grain trade is now factoring in uninterrupted exports from the Black Sea region.
Here in Canada
In Canada, 2023 barley production is expected to finish near 10.0 million tonnes, unchanged from last year. Chinese demand for Canadian barley is uncertain for the 2023/24 crop year, but many cattle feeders have become accustomed to using U.S. corn. The hassle of sourcing is much easier, and quality consistency makes corn more efficient for feedlot operators, even if the cost is slightly higher.
During the fall, 500-pound steers were readily trading around the psychological $300/cwt level in Western Canada. During the first half of March, 500-pound steers were trading near $330/cwt as feed grain prices came under pressure. During the fall, December corn futures have potential to trade down to the $4/bu. level, which would put the October feeder cattle futures near $245. Steers averaging 500 pounds have potential to trade in the range of $360-$400/cwt in September.
