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Lower feed grain prices improve cattle outlook

The North American cattle industry is poised for positive economics over the coming year with stronger feeder cattle prices and a rebuilding of feedlot equity, as the two-year reign of historically high corn and barley prices comes to an end.

The U.S. and Canada will replenish coarse grain stocks during the 2013-14 crop year allowing cattle market to function on regular supply and demand fundamentals. This fall could be the first significant period of heifer retention thereby reducing feeder cattle availability. The function of the feeder cattle market is to encourage herd expansion given the lower inventory numbers.

From the feedlot sector, lower feeder cattle placements will reduce beef production during the winter and spring 2014. Fed cattle prices in the deferred months appear to be incorporating a risk premium due to the uncertainty in beef production.

While retail beef prices continue to trend higher, rising consumer incomes bode well for a year-over-year increase in consumer spending resulting in stronger beef demand. Packing margins are projected to remain in positive territory thereby allowing more breathing room for fed cattle prices and further enhancing the feeder market.

BARLEY DOWN $50

With feed input costs being the largest factor influencing feeder cattle prices and feedlot margins, as of mid-August, feed barley in southern Alberta was trading in the $230/mt to $235/mt range — down over $50 from the highs in spring. Canadian barley production is expected to exceed 9.0 million metric tonnes (mt), up from 8.1 million mt in 2012. U.S. corn production could exceed 14 billion bushels, up from the drought-stricken crop of 10.8 billion bushels last year. U.S. corn is being offered into the Lethbridge area at $235 for fall delivery and this will keep a lid on the Canadian feed grain prices. Looking forward, I wouldn’t be surprised to see Lethbridge barley under $200 delivered to the feedlot during September and October.

Canadian yearling prices during the fall are expected to trade $20/cwt higher than last year due to the weaker feed grain complex. The USDA has reported record high prices for 800-pound feeder cattle at certain auction markets in the Midwest as feedlots factor in the lower costs per pound gain.

For example, in Nebraska, top-quality steers averaging 926 pounds sold for $152/cwt in mid August. At the same time, similar cattle were quoted at $137/cwt in the Calgary region. The Canadian feeder market has been lagging the U.S. but will come in line once the yearling run in Western Canada gets into full swing and Alberta feedlots realize the lower feed grain price structure. I’m expecting calves under 500 pounds to reach over $200/cwt by calendar year end.

HIGHER HEIFER RETENTION

The U.S. cow slaughter during the first half of 2013 was marginally higher than last year. However, the function of the feeder market is to encourage heifer retention and reduce the cow slaughter. In addition to lower feed grain prices, feeder cattle values will be supported by lower heifer availability for feedlot placements. The U.S. feeder cattle pool could be down by one million head from last year due to lower calf crop and heifer retention.

Feedlot margins have struggled in red ink for most of 2013, but have moved into positive territory in late summer. Alberta packers were buying cattle in the range of $119/cwt to $120/cwt in mid-August and breakeven on many closeouts is about $118/cwt. Looking forward, I’m expecting a slow climb in the fed market into the final quarter of 2013 and first quarter of 2014 due to lower beef production and steady consumer demand.

U.S. cattle on feed inventory has been running three to four per cent below year-ago levels which will result in a sharp year-over-year decline in beef production during the fourth quarter. Remember that summer placements during the past two years were abnormally high due to the U.S. droughts and limited forage production. This year, the market is experiencing a regular normal placement pattern in line with the seasonal tendency. Year-to-date U.S. beef production is running only 0.8 per cent below last year; Canadian year-to-date beef production is about nine per cent behind last year. The lower placements will cause cumulative beef production to further lag 2012 in the latter half of the year.

SHARP INCREASE IN FEEDER PRICES

Lower feed grain prices will cause a sharp year-over-year increase in feeder cattle prices this fall. The feeder market will be further enhanced by stronger deferred live cattle futures, which have potential to incorporate a risk premium due to the uncertainty in beef production.

Feeder cattle availability will be down from last year due to increased heifer retention and lower calf crops. The fed market is poised to slowly trend higher due to lower beef production in the final quarter of 2013 and first quarter of 2014. Consumer demand is expected to remain stable in the third quarter but jump in the fourth quarter as consumption increases.

Fed cattle prices will be capped in the first quarter of 2013 as consumer spending slows and limits the upside in wholesale beef prices. †

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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