Western Canadian feeder cattle prices trended lower throughout the fall. During late August and the first half of September, higher-quality yearlings in Manitoba weighing 850 pounds were trading in the range of $255-$260/cwt. In early December, replacement cattle of similar quality in the same region were quoted at $240. Calves had a similar trend, dropping $20- $25/cwt during the same period.
I have received many inquiries from cow-calf producers regarding the feeder cattle outlook for 2023. The market will likely remain under pressure through January and early February. In March, the feeder market will function to encourage expansion. Prices are expected to trend higher between March and October 2023.
The western Canadian feeder market will remain relatively flat during the first two months of 2023. Feedlots in Alberta and Saskatchewan are backed up with market-ready supplies of fed cattle. Fed cattle basis levels are historically weak or wide in Alberta because of the burdensome fed cattle supply situation. The backlog of market-ready supplies is only expected to be alleviated by late February or early March.
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Feeding margins on unhedged cattle are deep in red ink and there has been significant equity erosion over the past couple of years. Feeder cattle prices are still up 25 to 30 per cent from 12 months ear- lier. Feedlots have less money to spend while prices are above year-ago levels.
Adverse weather has also caused the calf market to incorporate a risk discount. Feedlots in Alberta are short-staffed and finishing operations are focusing on yearlings and pre-conditioned calves. Truck availability is also tight. All these factors will keep the feeder market under pressure during the first two months of 2023.
Change is coming in fundamentals
As the fundamentals will start to change in March, there are four main factors to watch closely.
First, the U.S slaughter pace during January and February is expected to be very similar to the first two months of 2022. Given the placement data on the cattle-on-feed reports, U.S. fed cattle supplies are relatively burdensome in the short term.
Carcass weights have been increasing. In Western Canada, the Alberta plants have the bulk of their January and February requirements covered which will keep the Alberta fed cattle price relatively flat. In March, U.S. supplies of market-ready cattle will drop sharply below year-ago levels. Similarly, the backlog of market-ready supplies in Western Canada will also be cleaned up by mid-March. Basis levels will improve in Western Canada.
The fed cattle market on both sides of the border is expected to percolate higher during March and April. This will enhance the feeding margin structure. Feedlots are expected to move through eight months of positive margins. This is something that we haven’t seen in a very long time.
Secondly, the U.S. cow slaughter during 2022 reached historical highs (see chart at top). The drought in the U.S. Southern Plains caused the contraction phase to extend. The cow slaughter is expected to drop sharply from March through December of 2023. This will contribute to lower U.S. beef production.
Thirdly, the 2022 U.S. calf crop is expected to come in at 34.3 million head, down 785,000 head from 2021. The 2023 calf crop is expected to decline given the cow numbers.
Finally, lower supplies along with higher prices will encourage heifer retention. I’m not expecting significant retention during the first four months of 2023; however, U.S. cow-calf producers will start to hold back on heifers in May if pasture conditions are favourable. This will further decrease available supplies of feeder cattle. U.S. feeder cattle supplies outside finishing feedlots as of July 1, 2023 are projected to be 33.7 million head, down two million head from July 1, 2022.
It all means the year-over-year decline in U.S. beef production starting in March 2023 will drive fed cattle prices higher and improve margins for finishing feedlots on both sides of the border. U.S. cow slaughter is expected to decline to historical lows in 2023 further contracting the beef supply. Cow-calf producers will increase heifer retention starting in May if pasture conditions are favourable. Feeder cattle prices are projected to trend higher from March through October.
