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Higher feed costs to push calves down

I’ve received many inquiries from cattle producers regarding the barley outlook for the summer and fall. The cost-per-pound of gain is an important factor determining feeder cattle prices and there is generally an inverse relationship between feed grain prices and feeder cattle values.

When feed grain prices increase, (as experienced during the U.S. Midwest drought of 2012) feeder cattle prices tend to come under pressure to the extent that margins in the feedlot sector move into negative territory.

Earlier this winter, for example, 840-pound steers were selling for $240/cwt and the Lethbridge delivered barley was $4.35 per bushel resulting in a break even selling price of $184/cwt for the finished animal.

If the price of feed barley increases, the purchase price of 840-pound steer needs to come down in order to keep the break even price constant. Feedlots generally bid up the price of feeder cattle so there is very little margin for finishing cattle.

barley chart

1/ includes barley processed domestically and then exported as malt.
photo: File

Keep eye on grain production

Through the growing season, it is prudent that cattle producers keep up with crop conditions and yield prospects because the sharp operators are constantly updating their ideas for barley production and price forecasts, which influences what they can pay for feeder cattle.

The supply and demand table for Canadian barley covers years back to 2011-12 for comparison but the eight-year average is what I use to gauge the price forecast. I use the eight-year average because during the 2006-07 crop year cereal grains moved into a new price range due to growing ethanol and biofuel usage. The eight-year average price delivered to a Lethbridge area feedlot is $187/mt. If the carryout or ending stocks for the crop year is below the eight-year average carryout, prices will trade above the eight-year average price and vice versa. If the carryout is about the same as the eight-year average then analysts look at seasonal tendencies from larger supplies at harvest to the peak demand season, which is April.

We are over half way through the 2014-15 crop year and we have a fairly good handle on the fundamental structure which will result in a carryout of 1.3 million mt. This is down from the eight-year average of 1.8 million mt so we can expect that feed grain prices will be relatively firm to slightly higher for the remainder of the crop year. Feedlot operators will likely reign in their buying ideas for feeder cattle in April through July should the price of barley increase by $20/mt to $30/mt as expected.

Tight supplies forecast

Looking forward to 2015-16 crop year, the grain industry is anticipating a five per cent increase in barley acreage. Barley producers in the non-major feeding regions are expected to plant malt barley on the hopes of malt selection. Malt barley prices have been in the range of $5.50/bushel to $6/bushel resulting in one of the higher returns per acre compared to other crops. Using a typical abandonment rate and average yield of 60 bushels per acre, production will finish near 7.2 million mt.

This is 2.2 million mt below the eight-year average production so we are starting with historically low production. Using an estimated barley export program of 800,000 mt (which will be mostly malt barley) and similar demand as this crop year, the carryout for 2015-16 will be extremely tight at 1.0 million mt. This could cause barley prices to strengthen an additional $30/mt to $50/mt next winter, which would cause feeder cattle prices to come under pressure. As a rule of thumb, a $50 jump in barley prices causes the cost per pound gain (barley and silage only) to increase by $0.20 per pound.

The outlook for feed barley is for higher prices next winter if average yields materialize and seeded acreage increases by five per cent. Currently, feedlots whave bid up the price of feeder cattle so there is very little margin in finishing animals. If feed barley prices strengthen and fed cattle prices stay relatively constant, feeder cattle values will soften from current levels.

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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