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It’s a bullish market for feeder cattle

Market Update: This is a good time to buy bred heifers or cow-calf pairs

The U.S. calf crop has been shrinking since 2018.

I’ve received many inquiries from cow-calf producers and backgrounding operators regarding the price outlook for feeder cattle. As of early September, tan steers coming straight off grass averaging 920 pounds were quoted at $199 in southern Alberta; Angus-based heifers weighing 850 pounds were valued at $187. Yearling prices have been hovering at 52-week highs over the past month and it appears that these cattle will remain firm into the fall.

The November 2021 and March 2021 feeder cattle futures have been trading at equivalent values. Therefore, prices are expected to remain flat throughout the fall and winter. Calf prices have been rather soft due to the high input costs. Barley prices continue to trade near historical highs. Silage in southern Alberta is valued at $100-$110/tonne. Straw prices have been quoted from $100-$120/tonne depending on the region in Alberta. Input costs are record-high to hold these calves over the winter.

The cost-per-pound gain for finishing cattle is only a small premium over backgrounding. We’re heading into the fall run. Producers are asking if they should sell their calves now or hold onto them into the winter. Therefore, I thought this would be an optimal time to provide an overview of the factors that will drive the feeder market over the next four to six months.

What drives the feeder market?

From 2017 through 2020, the Canadian calf crop hovered around 4.350 million head. The drought may have resulted in cow liquidation but the Statistics Canada semi-annual inventory report showed that farmers increased heifer retention for breeding in the first half of 2021. We’re not going to see a major change in the 2021 calf crop.

The U.S. calf crop has been shrinking since 2018. The U.S. cow slaughter from January through July was 2.049 million head, up 130,000 head from the same period of 2020. I’m expecting a year-over-year decline of 400,000 head in the U.S. calf crop. Looking at the attached chart, the 2021 calf crop is similar to 2012 and 2013. We’ll likely see another year-over-year decline in the U.S. calf crop during 2022, given the higher feed grain prices. We have a contracting cattle herd — there is no doubt about it.

Feed barley prices in southern Alberta have been quoted in the range of $390-$420/tonne delivered through the harvest period. Given the drought conditions across the Prairies and the expected export demand, the barley market will remain firm into the fall.

It’s important to note that U.S. corn is trading into the Lethbridge area in the range of $350-$365/tonne for November through July 2022 delivery. There is a high probability we will see three to four million tonnes of U.S. corn trade into Alberta and Saskatchewan during the 2021-22 crop year. This will bring down the cost-per-pound gain and support the feeder market. Longer term, we’re looking at a year-over-year increase in Canadian barley and U.S. corn acres. Western Canada weather patterns occur in 18-year cycles and 2004 was cold and wet. Expect trend yields for U.S. and Canadian barley. Feed grain supplies will be extremely burdensome during the fall of 2022.

As of early September, the February 2022 live cattle futures were trading at $138 while the April 2022 contract was at $141. Using an average basis and the current exchange rate, the Alberta fed cattle will likely trade in the range of $172 to $174 during February through April 2022. This is up about $10 to $15 from the values during April of 2021. The increase in fed cattle prices is offsetting a portion the higher feed grain and input costs.

Higher prices through 2022

The fed cattle market is expected to trend higher during the spring of 2022. The U.S. economy is expanding and we’re going to see a global economic recovery. We could see the February and April live cattle futures increase by another $5 to $6. That wouldn’t be surprising because beef demand is increasing.

Given the current outlook, I still believe this is a good time to buy bred heifers or cow-calf pairs. Some of the values I’ve seen suggest that you’ll have these bred heifers paid for in one year and then you’ll only be faced with maintenance costs. The costs to hold these cows are higher this year but you will be rewarded in the long run. Sacrifice this year to reap the rewards for the next six to eight years. Secondly, you want to hold your calves as long as possible. Try to hold the calves until they are over 700 pounds. Major feedlots do not want to contend with these lighter weights. Silage and straw are expensive. I’m looking for further upside in the live cattle futures. Once feeding margins move into positive territory, you will see a jump in calf prices.

Backgrounders need to secure ownership sooner rather than later. If you wait until November or December to fill pens, you will have stiff competition. Try to own lighter-weight calves and be aggressive. Once the yearling run is over and calves come into focus of major feedlot operators, these calves could gain $10 to $15 overnight. The market is in the middle of a bullish run for feeder cattle.

About the author

Columnist

Jerry Klassen is president and founder of Resilient Capital, specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204-504-8339 or via his website at ResilCapital.com.

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