In mid-February, Alberta packers were buying fed cattle in the range of $273 to $275 on a dressed basis while live prices were quoted from $163 to $165. Fed cattle prices have been relatively flat so far this year. However, feeder cattle prices dropped sharply in January and failed to recover. This is largely due to weaker feeder cattle prices south of the border.
Feeder cattle that usually move off small-grain pasture in March and April are being placed sooner during the winter due to drought-like conditions in the U.S. Southern Plains. Feed barley prices have been firm throughout the winter and stocks are expected to become extremely tight by the end of the crop year. This could also be tempering the upside in the Canadian feeder market.
The Canadian dollar has deteriorated and been very unstable. Rising interest rates, weakening bond prices and a volatile equity market have investors shifting capital into U.S. dollars. A safe-haven investment strategy is needed during this period of uncertainty.
The cattle inventory report was considered supportive for feeder cattle market because the herd did not expand as quickly as expected. The U.S. calf crop came in at 35.8 million head, which reflects a year-over-year increase of 0.715 million head. It is important to realize that many analysts were projecting a year-over-year increase of 1.2 million head.
Secondly, the report implies that the number of feeder cattle outside of feedlots on Jan. 1 was 26.1 million head, 1.6 per cent below last year. We’ve seen U.S. November and December feedlot placements come in higher than expected due to the drought-like conditions in the Southern Plains. This suggests feedlot placements for March and April could be sharply below year-ago levels.
Currently, the feeder market is experiencing a sluggish tone because feedlots are carrying sufficient numbers. However, feeder cattle supplies could be abnormally tight in March and April, which would result in higher prices. Looking forward, this is constructive for fed cattle prices in the third and fourth quarters of 2018 because beef production will be lower than earlier projections. This is a fundamental shift compared to earlier expectations.
Seasonally, the fed cattle market tends to percolate higher through March and then soften in April. Beef demand tends to surge in March while early-spring beef production will be similar to last year. Moving forward the fundamentals shift quite quickly. Given the placement schedule this past fall and winter, second-quarter beef production will be sharply above year-ago levels, causing the fed cattle market to come under pressure.
There is potential for a divergence between the fed and feeder cattle markets in the second quarter. There is usually a surge in U.S. feedlot placements in March and April when feeder cattle move off small-grain pasture. However, the cattle inventory data shows us that feedlot placements will be down from year-ago levels in March and April. Therefore, the feeder market could actually percolate higher in the spring and summer. The fall feeder cattle futures are reflecting a premium over the March and May contracts, confirming ideas on the placement schedule. Unlike the feeder cattle, the October live cattle futures are trading at $9 discount to the April contract.
As of late February, medium- to larger-frame fleshier Charolais-cross steers averaging just under 850 pounds were trading for $175 in central Alberta. Similar weight and quality heifers were quoted at $162. If we think back to my previous article, an average basis is $12. If we use the March feeder cattle close of US$147.27 and an exchange rate of US$0.78950, the feeder cattle basis is $10 for these steers. Given the current basis, this is actually a good buy for feedlot operators. The cow-calf producer or backgrounding operator should probably look at additional options, which I’ll cover in the next article.
Feedlot margins have been hovering between $80 to $120 per head this winter. Despite the positive margins, weakness in the deferred live cattle futures has failed to enhance buying interest. Feedlots are factoring larger than expected U.S. beef production during the May-June period because of the sharp year-over-year increase in placements during the winter.