Fed cattle prices were hovering in the range of $158 to $160 in mid-February, slightly lower than month-ago levels. The markets are relatively strong and I’m expecting the yearly highs to occur over the next month.
First-quarter beef production is coming in marginally lower than anticipated, but supplies are building. The recent cattle-on-feed report and USDA cattle inventory report confirm the aggressive herd expansion south of the border. This will cause fed cattle markets to trend lower from the April through August period.
Feedlot margins have been quite healthy over the past couple of months with break-even pen closeout values near $140. We’ve seen a rebuilding of equity in the feedlot sector, which has spilled over into the feeder cattle complex. Tan medium-flesh steers averaging 900 pounds were quoted at $163 in central Alberta; higher-quality 800-pound steers have sold from $160 to $163 across the Prairies while mixed steers averaging 600 pounds were selling from $188 to $192. Feeder cattle prices are also expected to grind lower moving forward as feedlot margins narrow and the fed cattle price adjusts to the surge in beef and pork production.
The USDA cattle inventory report confirmed the aggressive expansion over the past year. Beef cows that have calved were 31.210 million head as of January 1 2017, which is up three per cent or one million head from last year. It’s important to remember that most of these cows are relatively young. The 2016 U.S. calf crop was 35.082 million head, which was also up three per cent or 1.0 million head from last year. More calves born equals more feedlot placements equals a year-over-year surge in beef production. Lower prices are on the horizon so don’t expect the markets to strengthen.
Production is increasing
The USDA estimated Jan. 1 cattle-on-feed numbers at 10.6 million head, which was relatively unchanged from year-ago levels. However feedlot placements in December were up a whopping 18 per cent over year-ago levels. The accompanying table shows the projections for quarterly beef production. First-quarter production is similar to year-ago levels at 5.9 billion pounds. However, second-quarter production is forecasted to finish near 6.645 million pounds, up a ghastly 458 million pounds over 2016.
The USDA is expecting similar year-over-year increases in the third and fourth quarters. I also need to point out there are also projections for a record large fourth-quarter pork production estimate.
The Canadian cattle herd has not experienced the significant growth as our U.S. counterpart. The 2016 calf crop is expected to come in at 4.350 million head, up from 2015 crop of 4.298 million head. The number of beef cows that have calved from Jan. 1 2011 through Jan. 1 2016 has dropped by 216,000 head, but we are expecting minor heifer retention to spur on the marginal expansion.
Keep in mind the expansion is relatively small in the grand scheme of things so that market influence is negligible. Alberta and Saskatchewan Jan. 1 cattle on feed numbers totalled 858,129 head, down eight per cent from Jan. 1 of 2016. December placements were 93,999 head, up three per cent over December of 2015.
As of mid-February, the April live cattle futures were trading at $113 while the June contract was at $104 and the August contract at $101. The market is factoring in the larger beef production with lower prices in the deferred positions. I’ve mentioned in my previous article the factor known as the ‘constellation of prices,’ whereby the nearby contract pulls up the deferred contracts. Although the June contract is at $104, the market likely has downside potential.
Feeder cattle are currently priced so that feedlot margins are near break-even for the summer period. Again, as of mid-February, the May feeder cattle futures were at $121 while the August contract was at $123 and the November contract was at $121. The current environment is probably the highest prices we’ll see for feeder cattle this year.
Remember, the current fed cattle market pulls up the feeder market in the deferred positions. This is kind of a gift for cow-calf producers and backgrounding operators to hedge or take some price protection on their fall marketings.
I also want to point out the upside potential for the feed grain markets during the summer and fall period. Barley has been trading in the range of $158/mt to $162/mt delivered Lethbridge and next summer and fall, the market has potential to be $20/mt to $30/mt above current levels, which will also weigh on the feeder cattle market.