During the first half of August, Alberta packers were buying fed cattle on a live basis in the range of $173-$176 FOB the feedlot in southern Alberta. Fed cattle prices have been relatively flat over the past month as the U.S. market contends with a sizeable year-over-year increase in fed cattle supplies. Alberta basis levels had strengthened as U.S. prices come under pressure.
Ontario fed cattle values were quoted at $186 FOB the feedlot, also unchanged from 30 days earlier. Beef demand is holding higher than anticipated on both sides of the border. Despite the historically high inflation numbers, consumers have not cut back on “at home” or “away from home” food spending.
The cattle market will move through a transition phase in the fourth quarter of 2022. Beef and cattle fundamentals will be historically tight during the final months of 2022 and first half of 2023. According to the USDA, the 2022 calf crop is expected to come in at 34.600 million head, down 485,000 head from the 2021 calf output of 35.085 million head.
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Canadian feeder cattle prices are expected to trend higher throughout the fall. As of early August, central Alberta steers averaging 1,000 pounds were being forward contracted for $212 for September delivery. Mixed steers of average quality weighing 600 pounds were reaching up to the $263-$270 range. In the Lethbridge area, pee wee calves weighing 300-400 pounds were trading from $300 to as high as $310 in the auction market. Producers are in sticker shock. Prices are similar to the rally of 2015.
Culls due to dry conditions
The USDA Cattle Inventory Report was considered bullish for the fed and feeder markets. The number of beef cows that had calved as of July 1 was 30.350 million head, down 750,000 head form the July 1, 2021 number of 31.100 million head.
Keep in mind the U.S. beef cow slaughter from Jan. 1 through June 30 was 2.002 million head, up 253,000 head from the same period last year. Pasture conditions were in poor shape this past spring and summer, resulting in higher cow culling rates.
More importantly, heifers for beef cow replacement as of July 1 were 4.150 million head, down 150,000 head from 12 months earlier. There have been no signs of heifer retention. It didn’t make sense for cow-calf producers to hold back on heifers due to high feed and forage prices. This will change in the final quarter of 2022.
Canadian calendar year-to-date feeder cattle exports to the U.S. for the week ending July 16 were 138,392 head, up considerably from a meagre 50,902 head last year. The lower U.S. calf crop has resulted in stronger demand for Canadian feeder cattle.
After 4 1/2 years of contraction, the feeder cattle market will function to encourage expansion in the fall of 2022 and throughout 2023. It’s important to note that the USDA estimated the 2022 calf crop at 34.6 million head, down nearly 500,00 head from 2021. Traders believe the calf crop will be closer to 34.3 million head given the number of beef cows that have calved. Lower calf crops result in lower feedlot placements which eventually translates into lower beef production.
U.S. fourth-quarter beef production is forecasted to finish near 6.7 billion pounds, down over 400 million pounds from the 2021 fourth-quarter output of 7.1 billion pounds. Feedlot margins will improve from October through December and finishing operations will bid up the price of feeder cattle.
During the first quarter of 2023, beef production will experience a year-over-year decline of over 500 million pounds. The supply fundamentals tighten further in the second quarter of 2023 when beef production will decline by over 700 million pounds from a year ago.
Cattle producers will experience unprecedented market behaviour. Remember the feeder cattle futures are the live cattle five months forward. Therefore, fed cattle prices are expected to reach historical highs in the April/May period of 2023. Feeder cattle prices in Western Canada will experience historical highs in October or November of 2022.
Canadian barley production is expected to reach 10.5 million tonnes, up from last year’s crop size of 6.9 million tonnes and up from the five-year average of 9.2 million tonnes. Chinese demand for Canadian barley will be down sharply due to additional competition from Russia and France.
Barley prices will trend lower through harvest, allowing feedlot operators to lock in favourable margins. Keep in mind the hard red spring wheat crop is one month behind normal development in eastern Saskatchewan and Manitoba. I wouldn’t be surprised if there were five to six million tonnes of actual feed wheat production in Western Canada, compounding the burdensome feed grain supply.
