The fed and feeder cattle market have many fundamental factors to digest over the next few months. Alberta packers were buying fed cattle near $169 in late October, which is down from the late spring highs of $204. Breakeven values on pen closeouts are in the range of $195 to $198 so in the best-case scenario, margins are bleeding over $300 on a 1450 pound steer.
Feedlot inventories usually run at seasonal lows during the early fall period but packers are well covered for the nearby requirements, which is causing cattle to back up in the feedlot.
Wholesale choice beef values were quoted at US$204/cwt in late October, down from US$250/cwt for the same time last year. Carcass weights are running 30 lbs above year-ago levels and there is no signal that this environment is turning around. The negative margin structure has weighed on feeder cattle prices with prices down approximately $30 to $40 from the summer highs. Shorter-keep cattle have lead the markets lower because feedlots cannot forward price these cattle at profitable levels. The longer time frame on lighter weight calves will allow more time for the market to turn around, but the outlook is fairly uncertain looking forward. Growing beef and meat supplies along with stagnating consumer demand have producers enduring above normal risk tolerances on the next round of feeding.
U.S. cattle on feed inventories have been running three per cent above year ago levels and with the heavier carcass weights, the USDA raised beef production estimates for the fourth quarter of 2015 and all of 2016. Production is coming in larger than anticipated in the short term and first quarter supplies for 2016 are also expected to show a year-over-year increase of nearly 300 million pounds.
The second quarter beef production for 2016 is now expected to be 700 million pounds above 2015. The bulk of the yearly increase is coming in the second quarter, which is a cause for concern buying feeder cattle at the current levels that will be marketed next spring. The cattle market and overall beef complex is functioning to encourage demand as supplies increase. U.S. pork production was also revised upward while marginal revisions were made for poultry.
Canadian beef production for the week ending October 10 was 749,298 mt, down four per cent from last year. However, exports of slaughter steers and heifers to the U.S. for the week ending October 3 were just over 159,000 head, down 46 per cent from 2014. The lower beef production along with the year-over-year decline in live cattle exports have cattle backed up in the feedlots.
September and October are months of seasonal low demand, which has not helped absorb the growing supplies. At-home food spending has actually dropped below year-ago levels by 0.5 per cent; at the same time, away-from-home food spending has dropped from 10 per cent in summer to only five per cent. The dip in overall food spending has resulted in softer wholesale beef prices as packers struggle to move product.
I’ve mentioned in previous articles the U.S. economy has peaked out. We are not seeing major improvements in employment levels. Nor are we hearing of significant increases in disposable income, which is needed to sustain the beef complex. Another major sign of stagnation is that U.S. housing starts have tapered off after reaching eight-year highs in the summer. Canada is basically in a recession and it doesn’t appear that will see any changes in Canadian consumption patterns to absorb the surplus production.
Backgrounding and feeders
I’ve received many inquiries from feedlots and backgrounding operators in regards to the feeder market. Prices remain elevated so that producers cannot forward price calves or yearlings at profitable levels. As of late October, the December live cattle futures were trading near $142 but the June contract was at $132. Similarly, the November feeder cattle futures were trading at $192 while the May contract was at $181.
We’ve seen a sharp drop in the feeder cattle market but a prolonged period of negative margins could result in another major decline in the spring period.
Cow-calf producers will want to sell sooner rather than later as I’ve mentioned in previous articles. Backgrounding operators need to buy minimal numbers over time and use any rally in the feeder market to buy their price insurance or hedge themselves. The cattle market is infamous for seasonal rallies and consumer demand peaks in December and then again in March. These are two timeframes where the market may allow a hedging opportunity.
I’m still friendly to the feed grains complex longer term and expect barley, feed wheat and corn prices to strengthen over the winter. This could further weigh on the feeder market but overall, producers need to be aware that they will be holding cattle in a longer term downward trending market.