Retail beef prices continue to hold value near historical highs while restaurant spending has exceeded expectations. While fed cattle prices have come off the highs, western Canadian feeder cattle markets continue to trend upward. In central Alberta, higher quality 900-pound steers are reaching up to the range of $310-$315/cwt. Steers in the 850-to 900-pound category are trading up to $315-$320/cwt. Compared to 30 days earlier, the yearling market is up about $20/cwt. The USDA’s July 1 Semi-Annual Inventory Report showed that the U.S. cattle herd remains in contraction phase. U.S. feeder cattle prices in Nebraska appear to be trading at a premium to central Alberta. The feeder market is bracing for stronger export demand for Canadian feeder cattle in the final quarter of 2023.

U.S. feedlot placements from April 1 through June 30, 2023, totalled 5.381 million head, up 59,000 head from second quarter of 2022. The marginal increase in placements during the second quarter will cause market-ready fed cattle supplies of steers and heifers to be similar to last year in the final quarter of 2023.

Dairy cattle may factor in

The U.S. monthly beef cow slaughter is running 30,000 to 40,000 head below year-ago levels. However, the dairy industry in the U.S. is struggling with oversupply. We’re likely going to see a year-over-year increase in the dairy cow slaughter in the final quarter of 2023, which will offset a portion of the lower beef cow slaughter. This is important. In order for markets to go up, supplies need to tighten. In the fourth quarter of 2023, U.S. beef production will be very similar to the third quarter of 2023. Supplies are flatlining in the latter half of 2023 so the market will be very sensitive to changes in demand.

Feedlot placements in Alberta and Saskatchewan from April 1 to June 30 of 2023 were 315,800 head, down only 31,800 head from the second quarter of 2022. Due to the year-over-year decline in U.S. beef production, we’re expecting fed cattle exports to increase in the final quarter of 2023. Last year, the fed cattle basis was historically wide over the winter. During the fall of 2023 and winter of 2024, we expect the Alberta fed cattle basis to remain relatively strong. The domestic market will need to trade at a premium to the U.S market in an effort to curb fed cattle exports. At the same time, export demand for Canadian fed cattle will be stronger than last year.

Inventory highlights

There are three main points to consider from the U.S. Semi-Annual Cattle Inventory Report. First, the 2023 calf crop was estimated at 33.8 million head, down 664,000 head from 2022. Secondly, the number of beef cows as of July 1, 2023, was 38.8 million, down two per cent or 800,000 head from July 1 of 2022. Finally, the number of heifers for beef cow replacement on July 1, 2023, was 5.050 million head, down 100,000 head from 12 months earlier.

History tells us that the U.S. cow-calf producer needs one year of historical high prices before expansionary behaviour begins. We can also draw the conclusion that the previous highs in 2015 are no longer sufficient. The fed and feeder market needs to move to new highs. Fresh record-high fed and feeder cattle prices are expected during the spring of 2024.

Notice that U.S. first- and second-quarter beef production for 2024 is down over 600 million pounds each quarter compared to the same quarter of 2023. We expect fed cattle prices to trend higher in the first half of 2024 and this is driving the feeder market during the fall of 2023.

Beef demand is a concern. A one per cent increase in consumer spending equates to a one per cent increase in beef demand and vice versa. Consumer spending is two-thirds of GDP. The economy is expected to hold up in the latter half of 2024. However, we’re expecting U.S. and Canadian GDP to hover around one per cent growth in the first half of 2024. The economy will start to feel the effects of higher interest rates. The theme from the Federal Reserve over the past six months has been “higher for longer.”

Fed cattle prices will likely consolidate during the latter half of 2024 while feeder cattle prices have potential to percolate higher. Fed cattle prices will likely remain firm during the first half of 2024 due to lower beef production. However, beef demand is expected to decrease in the first half of 2024, which will limit the upside for fed and feeder cattle prices.

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Feedlots in Alberta and Saskatchewan are backed up with market-ready supplies of fed cattle. Carcass weights are sharply above a year ago. Alberta fed cattle basis levels are historically wide. Domestic processing plants have nearly 100 per cent of their December requirements covered and nearly 50 per cent of their January and February demand on the books.

U.S. processing plants have been actively buying fed cattle in the range of C$184-C$186/cwt f.o.b. the feedlot but this has done little to alleviate the backlog of market-ready supplies. Some trade estimates have pegged this backlog as of Nov. 1, 2022, near 50,000 head combined between Alberta and Saskatchewan. Many feedlot operators have called me over the past few weeks asking when this backlog of market-ready supplies will be cleaned up.

Feedlots are backed up

How did the fed cattle situation become so burdensome? There are two main factors. First, the drought during the summer of 2021 resulted in a surge of feedlot placements between June and August of 2021. In the accompanying table, we have the feedlot placements for 2020, 2021 and 2022 for the respective months. Notice that during June through August of 2021, Alberta and Saskatchewan feedlot placements were 426,300 head, up 164,800 head from the same period in 2020. These cattle were placed in the summer of 2021 and ready for the fed cattle market during the winter, five to six months later. As of Dec. 31, 2021, the backlog of market-ready supplies in Western Canada was estimated at 100,000 head.

Usually, this backlog can be alleviated simply by increasing fed cattle exports. Unfortunately, the current environment is not that easy to correct for several reasons. At the same time, U.S. processors have had sufficient supplies available in their local market with the weekly slaughter pace running near capacity. Alberta fed cattle basis levels have been historically weak throughout the fall. A traditional fed cattle basis is C$4/cwt under the appropriate live cattle futures con 391.0 verted to Canadian dollars. This past fall, the fed cattle basis was in the range of C$20-C$24/cwt under the nearby live cattle futures.

Looking at the feedlot place table again, notice that the June through August 2022 placements were down 187,400 head from the same period of 2021. It takes one full year or cycle for the fed cattle supplies to return to normal. Therefore, the backlog of market-ready supplies in Western Canada will likely be cleaned up at the end of February. Alberta packers have been showing some historically strong basis levels for April through June 2022 as they anticipate an extremely tight fed cattle situation on both sides of the border. The fed cattle market will transition from encouraging demand in January 2023 to rationing demand through higher prices during April 2023.

Earlier in the summer, U.S. 2022 fourth-quarter beef production was projected to drop to 6.7 billion pounds. However, the drought in the U.S. Southern Plains, along with the larger-than-expected cow slaughter, has caused 2022 fourth-quarter projections to reach more than 7.1 billion pounds.

The U.S. market also moves through a transition, but nearly three months sooner than Western Canada. U.S. beef production is expected to dip to 6.7 billion pounds in the first quarter of 2023. This is down 400 million pounds from the fourth quarter of 2022. The U.S. beef complex also moves from a burdensome supply situation in the fourth quarter of 2022 to a historically tight situation in 2023.

The 2023 U.S. third-quarter production is expected to drop to 6.5 billion pounds, which is a year-over-year decrease over 600 million pounds. Usually, the fed cattle market trends lower from April through June. During 2023, we could see a counter-seasonal trend during the spring. This will bolster feeder cattle prices during February and March.

Alberta fed cattle prices will remain relatively flat through January. Basis levels will start to strengthen in February and we could see Alberta packer bids reach fresh historical highs in March and April. This will enhance feedlot margins and drive demand for replacement cattle. Feeder cattle prices are expected to percolate higher from May through August 2023.

We continue to project historically strong feeder cattle prices on both sides of the border during October of 2023. I have been encouraging cow-calf producers to expand their herds by purchasing bred heifers or bred cows. Prices are a steal as these bred cows and replacement heifers will probably be paid for in one year.

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Beef demand appears to be somewhat softer compared to January. Inflationary pressures are starting to take a toll on the North American consumer, with 40 per cent of Americans living paycheque to paycheque. U.S. disposable income has been on a downward slope since the government stimulus of March 2021.

Feeder cattle prices in Western Canada have been relatively stable. As of mid-March, steers weighing 800-850 pounds were quoted from $188 to $195 in central Alberta. Calves have been trending higher during February and March. Steers weighing 500-550 pounds have readily been moving in the range of $245-$255. Grass conditions are favourable moving into spring and the February 2022 live cattle futures continue to trade near the contract highs of US$152.

The fed cattle market in Alberta has been functioning to encourage demand due to the year-over-year increase in fed cattle market-ready supplies. Feedlot placements in Alberta and Saskatchewan from June through October of 2021 were 1.045 million head, up 217,700 head from the same time frame of 2020.

Higher placements in the summer and early fall of 2021 have resulted in a backlog of market-ready fed cattle supplies in Western Canada. Trade estimates suggest that Alberta feedlots were backed up with over 120,000 head of cattle at the end of February.

The Alberta fed market will continue to trade below U.S. values in an effort to increase exports. However, it appears that this backlog will only be alleviated in June. If feedlots didn’t hedge their production in some fashion, feeding margins are negative $150-$220 per head.

U.S. feedlot placements from June through October of 2021 were 9.921 million head, down 246,000 head from the same timeframe of 2021. In the U.S., market-ready supplies of fed cattle are below a year ago. In addition to lower market-ready supplies, the U.S. total cattle slaughter will likely finish 100,000 head above year-ago levels for the first three months of 2022.

Production higher than expected

Beef production has come in higher than expected in the first quarter of 2022 but this is due to the year-over-year increase in demand. U.S. beef production during the second and third quarters will be similar to last year. However, U.S. fourth-quarter output for 2022 is expected to have a year-over-year decrease of 328 million pounds. It’s a bit early, but U.S. beef production during the first quarter of 2023 is also expected to be down 300 million pounds from the first quarter of 2022.

The Russia and Ukraine conflict is having a two-fold influence on the cattle complex. First, Russia and Ukraine have both implemented export bans on wheat, corn and barley. Elevator bids for new-crop feed barley are in the range of $8/bu. in central Saskatchewan.

As it looks now, Canada may be the main supplier of feed barley to China in the 2022/23 crop year. Barley exports could reach more than five million tonnes, which would cause supplies in Western Canada to be historically tight for the third year in a row.

Secondly, the sanctions on Russia will continue to drive inflationary pressures in North America, resulting in softer beef demand. In mid-March, China was implementing lockdowns due to the spread of the Omicron variant which is also contributing to supply chain backlogs.

U.S. grocery store sales during February 2022 were down 8.4 per cent from January 2022; U.S. sales at eating and drinking places during February were up 3.0 per cent from January but down 8.3 per cent from December of 2021. It appears that beef demand peaked in the last half of January and the first half of February. Retail beef prices have been grinding lower during the first three months of 2022. Inflation will remain at higher levels over the next six months and continue to bite into beef demand.

The yearling market has likely put in the seasonal highs for the time being. The fed cattle market will likely trade sideways to lower over the next couple of months and feed grain prices will remain at historical highs.

There is no room to bid up the price of yearlings. Calves are a different story. The fed cattle market will likely trend higher during the final quarter of 2022 and first quarter of 2023. This will offset the higher feed grain prices. Next spring, U.S. feeder cattle prices are expected to trade at the highest levels since 2015 if yield trends materialize for the corn crop.

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October and December live cattle futures are trading near 52-week highs and this has supported nearby cash values. The U.S. vaccination pace has been exceeding expectations. The Canadian vaccination pace has been gaining momentum after a few hiccups earlier in spring. Beef demand appears to be coming in larger than expected. The U.S. economy is running in high gear with the recent U.S. stimulus package. Consumers have saved a tremendous amount of money over the past year, which will eventually flow into the economy as well.

Consumer confidence is now at the highest level since the start of the COVID pandemic. The fed cattle and beef market is being led by stronger demand, as supplies are still at higher levels. Feeder cattle prices are balancing stronger deferred live cattle prices with historically high feed grain values.

In central Alberta, higher-quality lower-flesh steers weighing 850 pounds were trading in the range of $183 to $188/cwt in mid-April, up $5 to $8 from the third week of March; higher-quality steers averaging 600 pounds were quoted from $225 to $228/cwt, also up $8 from a month earlier.

U.S. cattle-on-feed inventories have been running approximately five per cent above the five-year average. Year-to-date beef production has been very similar to year-ago levels. If we compare 2021 to 2019, fed cattle supplies are expected to be slightly higher which will result in a marginal increase in production during the second and third quarters.

In Western Canada, Alberta and Saskatchewan cattle-on-feed numbers as of April 1 were 1.011 million head, up five per cent from the five-year average. The Canadian weekly slaughter is running slightly above year-ago levels while fed cattle exports are similar to 2020. Fed cattle supplies and production are expected to remain relatively constant over the next four to six months. Therefore, the focus will be on demand for price direction.

U.S. consumers spending more

A one per cent increase in consumer spending equates to a one per cent increase in beef demand. The two are highly correlated. The U.S. economy is in a unique situation. The Biden administration passed the $1.9 trillion stimulus package in March, providing most Americans with a direct cheque of $1,400. There is potential for another $2 trillion infrastructure package in the near future.

On top of this, Americans have saved an estimated $1.6 trillion over the past year. The COVID pandemic shutdowns and constraints caused people to save money. Equity markets have been trading near historical highs. Consumer confidence is also reached 109.7 at the end of March, up from 90.4 in February. This reflects that consumers feel favourable about economic conditions and plan to spend in the near future. These are leading indicators of future economic activity. Employment is a lagging indicator but has also sharply improved in March after slower gains in the first two months of the year.

The main point is that beef demand will surge during the summer. The U.S. economy will continue to expand over the next year. This should result in higher fed cattle prices. The quarterly production figures show the April 2022 live cattle futures have traded near $132, the highest level since 2019.

As of late April, feed barley was trading in the range of $310-330/tonne delivered Lethbridge; wheat for feed usage was quoted from $310-$320/tonne. Canadian farmers may increase barley acres but wheat acres will be down sharply from last year. The USDA had U.S. corn acres up 325,000 from last year but this is not enough to replenish supplies. The U.S. corn carryout could drop to historically low levels at the end of the 2021/22 crop year.

Don’t expect much downside in the feed grain complex. This is the main factor influencing feeder market direction. When the feeder cattle futures are near contract highs, I’ve been advising producers to buy their price insurance because the U.S. cash market is not moving higher. Despite the optimistic tone in the fed cattle market, don’t expect too much upside in the feeder market. During spring, the feed grains complex tends to incorporate a risk premium due to the uncertainty in production; at the same time, the feeder cattle futures will incorporate a risk discount. Cash feeder prices will probably trade sideways in Western Canada over the next couple of months.

Heading into early May, the fed cattle market is expected to remain flat from now through summer. Feeder cattle prices will have some downside potential between now and the end of the crop year. Once the crop is established, then we could see further upside in the feeder market. I’m bullish on the fed and feeder markets from August onward but there could be some weakness in the short term.

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It was one year ago that North America went through one of the worst recessions in history. The common practice during a recession is to contract the herd because of low prices. However, history tells us otherwise. I thought this would be a good time to explain where we are in the cattle cycle and how cow-calf producers should respond. Canadian producers are price takers in a purely competitive market. Feeder cattle move actively both ways across the border until prices are equal. Therefore our focus is on the U.S. situation, given the size of its herd relative to Canadian cattle inventory.

A one per cent increase in consumer spending equals a one per cent increase in beef demanded. Consumer spending depends on consumer income. To be successful long term, the Canadian cow-calf producer has to focus on beef demand and disposable income of the average American consumer. The opportunity to make significant money is when the economy moves from the trough of the business cycle to the peak of the business cycle. There are four phases of the business or economic cycle that include: contraction, trough, expansion and peak.

When consumer incomes and spending increase, there is a direct relationship with beef demand. During contraction of the recession, consumer spending declines. When the economy is in the trough period of the recession, there is a sharp drop in interest rates. The U.S. Federal Reserve and the Bank of Canada post lower interest rates in an effort to enhance consumer spending. Once consumer spending starts to increase, beef demand also increases, pushing the cattle market to higher prices. I always tell cow-calf producers that the minute you hear that the Federal Reserve has dropped its benchmark lending rate to zero per cent from 0.25 per cent, hold back every possible heifer. This occurred in March of 2009 and again during March of 2020.

The U.S. cow-calf producer needs one year of prices above the five-year average before heifer retention starts and the cow slaughter declines. Then it takes 12 to 18 months of stronger prices before the calves of these heifers come on the market. In total, the timeline is 24 to 30 months of historically high prices before additional cattle numbers come on the market. The key point is that the U.S. cow-calf producer is generally still contracting or reducing the herd at a time when prices are making fresh historical highs. Throughout history, the U.S. cow-calf producer (generally speaking as herd mentality) bases their decision to expand or contract their cattle herd on the previous year’s prices.

What happened back in ’07

Let’s look at the example from the previous recession. The U.S. Federal Funds Rate was 5.0 per cent on August 2007; during May of 2008, the rate dropped to two per cent and by March 2009, the rate was 0.15 per cent. Rates stayed at these lows until December 2015 when rates moved up to 0.25 per cent.

The accompanying chart shows the U.S. calf crop (left axis) and the live cattle futures close at the end of July of each year (right axis). The live cattle futures made lows during the recession of 2009 — the July 2009 close was $84.70. Notice the calf crop was contracting from 2007 to 2014 but the live cattle futures were making fresh highs during 2012. It was 2015 before we realized the first year-over-year increase in the calf crop. Ironically, this was exactly the same time that interest rates were starting to increase.

Without going into detail, the main U.S. herd expansion occurs when interest rates are at the highs or moving higher. I don’t show the data here, but the U.S. cattle herd went through a major expansion from 1980 to 1982 when interest rates were at the roof. The U.S. cow-calf producer tends to expand when beef demand is being curtailed due to higher interest rates. We’re going to see that again in 2023 and 2024. The massive price spike in 2013 and 2014 occurred because heifers were being held back, thereby reducing beef production beyond normal market conditions. The feeder market is unique because during the expansionary phase, the higher the price, the less is supplied to the market. Under normal conditions, the higher the price causes supplies to increase. The feeder market is a unique study for this reason.

In conclusion, interest rates have been at historical lows. The U.S. calf crop has been declining for the last two years and we’ll likely see one or two more years of lower calf numbers. Beef demand is increasing and we’re seeing significant strength in the deferred live cattle futures. My advice to Canadian producers is to expand the cow herd over the next two years. After this, the market will likely have topped out and we’ll see the results of the U.S. expansion with sharp year-over-year increases in the calf crop. The key is to be two years ahead of our U.S. counterparts.

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China has been contending with a food shortage after three typhoons damaged a large portion of its crops in late August and September. This shortage comes on the heels of feed needs for expanding hog herd. The additional demand resulted in a sharp year-over-year increase in demand for Canadian barley.

Stronger feed grain prices in Canada and the U.S. had tempered the upside in the feeder cattle market. Farmers are now wondering if barley prices will remain at historical highs into new-crop positions. At the same time, cattle producers are wondering if the barley prices will ease to bring down the cost-per-pound gain. So it’s a good time to discuss factors affecting the barley market over the coming the summer and fall.

Strong demand at $320 MT

As of early March, barley was trading in the range of $300/mt to $320/mt across Alberta. Traditional truck freight spreads between southern Alberta and the non-major feeding areas of Western Canada had eroded. Prices were relatively flat across the Prairies due to the increase in offshore movement. Export prices off the West Coast have been equivalent to Lethbridge feed barley bids. The domestic feed market has been functioning to ration demand through higher prices. The market needs to trade high enough to slow offshore movement or encourage the use of alternative feed grains in feedlot rations. At this stage of the crop year, we haven’t seen any demand rationing.

Domestic and export demand continue to exceed year-ago levels. Canadian exports for the week ending February 21 were 2.3 million mt, up from 1.2 million at the same time last year. Statistics Canada reported domestic feed usage for barley from Aug. t 1 to Dec. 31 2020 at 4.2 million mt, up from 3.9 million mt during the same period of 2019. The latest data along with current demand projections confirm Canadian barley stocks will be historically tight at the end of the 2020/21 crop year.

What about alternative feed sources? U.S. corn is offered into the Lethbridge area in the range of $340/mt to $350/mt. Wheat for feed usage has been trading in the range of $290/mt to $315/mt, which is similar to barley. Canadian non-durum wheat exports for the week ending Feb. 21 were 11.0 million mt, up from 8.6 million mt last year. Statistics Canada also showed that non-durum wheat used for domestic feeding was 2.9 million mt from Aug. 1 to Dec. 31 2020, up from 2.4 million mt for the same period of 2019. Canadian non-durum wheat stocks will also be historically tight at the end of the 2020/21 crop year.

My outlook until fall

These are my predictions for now to the new crop year.

The Argentine corn harvest will move into full swing in April and the Brazilian harvest will begin in June. This may result in lower export values for corn but I don’t see significant imports of U.S. corn into southern Alberta. The U.S. corn situation is too tight. The most burdensome grain in North America is hard red spring wheat in North Dakota. We need to see milling wheat from North Dakota trade into the southern Alberta feed market later in spring and summer.

This spring, Canadian non-durum spring wheat area is expected to be down two million acres from 2020; at the same time, Canadian farmers are expected to see another million acres of barley. U.S. farmers are expected to increase corn acres by one to two million as well. I don’t think we’ll see much U.S. corn trade into southern Alberta until new-crop positions. China has been buying Canadian barley for September through January 2020 at an equivalent prices of $5.50/bushel to $6.00/bushel at the Alberta elevator. Canada may produce another 1.5 million mt of barley but this will have little influence on barley prices for new crop.

In China, corn prices and supplies are heavily regulated — barley trades in more of “free market” environment. The Chinese tariffs on Australian barley are expected to be in place until May 2025. The caveat is that Ukraine, France and Canada are the main suppliers to China due to phytosanitary agreements. Ukraine shipments are uncertain due to export quotas. French barley production is also expected to be up eight to 10 per cent over a year ago. Remember, food security has a different meaning when the population is 1.5 billion as in China or a meagre 36 million as in Canada. China can easily absorb the year-over-year increase in barley production from Canada and France.

Barley prices are expected to remain firm into new-crop positions. We need to see U.S. spring wheat trade into southern Alberta this summer. U.S. corn will likely trade into southern Alberta next winter; however, China could also be a major buyer of U.S corn, similar to the fall of 2020. It takes more than one crop year to rebuild stocks when a country such as China has a food shortage. If adverse weather materializes in the Midwest or Western Canada, there will be further upside in the in coarse grain prices in the upcoming crop year. There may be some harvest pressure for barley during September and October but there is little reason to justify significant downside in Canadian barley prices for new crop.

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The calf market will likely remain flat through this October and November. After December, calves that come on the market generally have the option to be placed on grass next spring or moved to a finishing lot. The calf market during the spring of 2021 is expected to reach back up to 52- week highs. We’ve seen two consecutive year-over-year declines in the U.S. calf crop and 2020 will be the third year of contraction in Western Canada. Canadian barley stocks will drop to historically low levels at the end of the 2020/21 crop year so this will temper the upside in the feeder market. In any case, the fed cattle market is expected to trend higher through the winter of 2021/22 and feedlots will be anxious to secure ownership of calves during the spring of 2021.

The backlog of market-ready supplies in Canada and U.S. will likely be cleaned up from December 2020 through March 2021. Fed cattle prices will trend lower in the second quarter of 2021 but the outlook for the third and fourth quarters of 2021 is for higher prices. Fed cattle values should be at two-year highs in the final two months of 2021. Calf prices will remain flat over the next few months. Don’t sell your calves during October 2020 because this will be the lowest prices of the year. From January forward, I’m expecting the calf market to percolate higher but the upside will be limited by the tight feed grain situation. Grass cattle are expected to be very strong next spring.

Fed cattle in Alberta

Alberta packers were buying fed cattle in the range of $132 to $134 FOB the feedlot in mid- September, down from the range of $138 to $140 during the third week of August. The fed cattle market continues to digest the severe backlog of market-ready supplies on both sides of the border.

Beef demand is slowly improving as the Canadian and U.S. economies continue to recuperate after the COVID-19 spring shutdown. However, constraints on gatherings and limitations on restaurant capacity continue to hinder consumption. Wholesale beef prices are down from year-ago levels as the market functions to encourage demand. The fed cattle market is expected to trade slightly higher moving forward as the burdensome supply situation is alleviated.

Yearling markets continue to trade at 52-week highs. According to Statistics Canada, yearling supplies are down from year-ago levels. The April 2021 live cattle futures have also been hovering around the highest levels since February, which has allowed feedlots to lock in profitable margins in the deferred positions.

Despite the stronger barley prices, we’ve haven’t seen any slippage in the yearling market. As of late September, larger-frame mixed steers just off grass in central Alberta were trading around $185, while similar quality 925-pound heifers were quoted at $174. The calf market is rather sluggish due to limited volumes; prices are similar to year-ago levels albeit down approximately $15 to $20 from the June 2020 highs.

The U.S. slaughter during August was similar to year-ago levels but the processed volume during September will likely finish below September of 2019. For the week ending September 19, the U.S. year-to-date slaughter was running 1.074 million head behind year-ago levels. The estimated backlog of market-ready supplies in U.S. feedlots at the end of August was estimated at 700,000 head.

In Canada, the weekly slaughter pace is running slightly below year-ago levels largely due to lower beef exports to the U.S. The year-to-date slaughter for the week ending Sept. 12 was 141,500 head behind last year. The estimated backlog of market-ready supplies in Canadian feedlots was estimated at 225,000 head at the end of August.

Optimism looking forward

While the current situation might appear depressing, there is optimism looking forward. The U.S. cow-calf producer and backgrounding operator held back on marketing during spring. Therefore, lower feedlot placements during the spring and summer will allow feedlots to clean up the backlog by the end of 2020. In the table of USDA’s quarterly production estimates, U.S. beef production during the fourth quarter of 2020 will be down from year-ago levels largely due to fabrication constraints at processing plants.

In the first quarter of 2021, beef production is expected to finish below year-ago levels due to the lower fed cattle supply situation. Second-quarter beef production has potential to reach 6.9 to 7.0 billion pounds, which could be a record for this timeframe.

After a brief period of tighter supplies, beef production will be burdensome in the second quarter and result in lower fed cattle prices. Longer term, 2021 third- and fourth-quarter production is projected to come in below 2020 levels. This will result in stronger yearling prices next spring because fed cattle prices have potential to be near two-year highs during the final quarter of 2021.

Yearling prices have been very strong over the past month but we’ll likely see prices soften moving forward. Late in November, yearlings will only be ready for the fed market after April 2021. The burdensome beef supply projections for the second quarter of 2021 will set a negative tone for 850-pound-plus cattle from November forward.

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In addition to the higher weekly slaughter, the average dressed weight is running about 10 pounds above last year. U.S. feedlot conditions are considered poor due to adverse weather, which has resulted in poor feedlot performance. We may see carcass weights decline over the next few weeks.

In Alberta, the average dressed weights are running below 2019 while the slaughter pace has been running similar to last year. Alberta feedlot margins have been hovering around breakeven. Western Canadian yearling prices have been on the defensive because pen space is limited. Alberta and Saskatchewan feedlot inventories are up 20 per cent from the five-year average. Prices for lighter calves and grass cattle remain firm. Yearling supplies during the fall of 2020 are expected to be down four to five per cent from 2019. At this stage, 2021 first-quarter beef production is expected to have a sharp year-over-year decrease. As of late February, medium-frame mixed steers on a light grain diet weighing about 840 pounds were quoted at $185 in central Alberta; mixed steers weighing 550 pounds were valued at $225 in the same region.

Cattle on feed as of Jan. 1 were 11.958 million head, up two per cent from 11.690 million head last year. Placements during Dec. 2019 were 1.828 million head, up 61,000 head or three per cent from 1.767 million head during Dec. 2018. Fed cattle marketings during Dec. 2019 were 1.834 million head, up five per cent from 1.741 million head during Dec. 2018. U.S. feedlot placements from September through December 2019 were 8.476 million head, up from 8.036 million head for the same four-month period during 2018. First-quarter beef production is now expected to finish near 6.5 billion pounds, however, second-quarter beef production could reach over 7.1 billion pounds. Second-quarter beef production is expected to be up 326 million pounds from 2019.

My Jan. 2020 column stated that market-ready supplies in Alberta and Saskatchewan during June and July could be up 100,000 head over last year. We’ve seen a sharp increase in feeder cattle imports during the final quarter of 2019, which will result in burdensome fed cattle supplies during the summer of 2020.

While the fed cattle market has an extremely bearish outlook, the feeder market looks more optimistic longer term. The USDA estimated the 2019 calf crop at 36.060 million head, down 254,000 head or one per cent from the 2018 calf crop. In addition to the lower calf crop, I mentioned earlier that feeder cattle were placed sooner than normal this past fall. Feeder cattle outside of U.S. feedlots as of Jan. 1 are expected to be down about three per cent compared to Jan. 1, 2019. The yearling market is expected to slowly trend lower into the summer. Feedlot margins will deteriorate into the summer. Alberta fed cattle prices are expected to drop by $15 between February and July. Barley prices are expected to percolate higher into the spring. This represents a double hit against the yearling market in the short term.

The year-over-year decrease in the U.S. calf crop will result in a tight yearling supply situation during August and September. I’m expecting 850-pound steers to trade above $200 next fall. Cattle that will be placed on grass during the summer have been very strong and will likely trade at higher levels throughout the spring and summer. Keep in mind I’m expecting barley prices to drop below $200/mt in southern Alberta during the 2020 harvest. Weaker feed grain prices will contribute to the stronger yearling market.

The coronavirus situation is considered a “black swan” variable for the cattle and beef markets. As of mid-February, it was not considered a pandemic because all 360 deaths have been in China with the exception of one. It’s important to realize the World Health Organization estimates that on any given year between 250,000 and 500,000 people die annually from the flu. In any case, the restricted travel of Chinese tourists within and outside of China has potential to result in lower beef demand. It’s very difficult to project the effects on the cattle and beef market long term. In 2009, the H1N1 influenza virus reached a pandemic level, but this is now a regular flu virus.

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In Nebraska, fed cattle were trading in the range of $114 to $116, up from the October average of $110. Basis levels in Alberta have deteriorated due to the sharp year-over-year increase in market-ready supplies. Carcass weights are quite high and margins have been hovering in negative territory over the past six months.

This environment in the feedlot sector has weighed on the feeder market. Higher-quality steers in central Alberta were valued at $185, down approximately $10 from the October average. Calves have also traded in a sideways fashion, but lighter-weight classes are about $4 to $8 higher compared to last month.

In southern Alberta, Simmental-based steers weighing 510 pounds were quoted at $230 in mid-November while black heifers were valued at $195. Pen conditions have been rather poor for bringing in replacements across the Prairies, which has also contributed to the lower buying interest for calves. Alberta feed barley prices have rallied about $15/mt over the past month due to the delayed harvest. At the same time, supplies of calves under 500 pounds are somewhat tighter than year-ago levels due to the year-over-year decline in the 2019 calf crop. There is a fair amount of uncertainty moving forward and the cattle markets have potential to be quite volatile over the winter.

The adverse weather during the summer and fall resulted in an abnormal marketing schedule for feeder cattle. U.S. and Canadian feeder cattle placements in the lighter-weight categories were sharply lower than year-ago levels during the summer. This will result in lower market-ready supplies in the first quarter of 2020. I’m projecting a sharp year-over-year decline in first-quarter beef production followed by a year-over-year increase during the second quarter of 2020. As it looks now, the fed cattle market will move from one extreme to another in the first half of 2020.

Lower interest rates

The U.S. Federal Reserve lowered interest rates by 25 basis points at their Oct. 30 meeting. This was the third downward adjustment since July. A lower interest rate environment is somewhat bullish for commodities and specifically for fed cattle for two main reasons. Lower rates enhance consumer spending, which increases beef demand. Secondly, we may be heading into a significant inflationary environment, which causes cattle prices to strengthen. The managed-money funds have been a net buyer of nearly 70,000 live cattle futures contracts from Sept. 17 through Nov. 5. The futures market is leading the cash market higher into the first quarter of 2020.

As of late November, the February and April live cattle futures were trading near contract highs. Packers have been more aggressive in the cash market by offering attractive basis levels for their first-quarter requirements. Feeding margins are expected to improve through the winter.

Cattle-on-feed inventories in Alberta and Saskatchewan were estimated at 724,200 on Oct. 1 according to CANFAX. I’m estimating that these inventories will reach up to 1.1 million head on Jan. 1 2010. The yearling market tends to be the strongest in the early-fall period when cattle on feed inventories are at seasonal lows.

From January through March, feedlot inventories are at seasonal highs so demand is not as strong as in the fall. When feedlots are full to capacity, the yearling market will not rally. Secondly, Statistics Canada’s semi-annual cattle on feed report showed that feedlots were carrying larger numbers of calves under one year old as of July 1. This may also contribute to lower yearling demand over the winter. Backgrounding operators need to be aware of three main factors during the winter. Second-quarter beef production will be extremely burdensome and feedlot operators know this — feedlot inventories are at seasonal highs. Finally, barley prices tend to percolate higher during the spring when road bans come into play and farmers are busy seeding. While feeding margins are expected to improve, don’t count on this translating into higher yearling values.

Calves are expected to trade sideways over the winter. Keep in mind these replacements will only be ready in the second and third quarters of 2020. At the time of writing this article, calves under 500 pounds were actually quite strong. The U.S. calf crop for 2019 is expected to be 36.3 million head, down from the 2018 crop of 36.4 million head. The Canadian calf crop for 2019 is projected to come in at 4.2 million head, down from 4.3 million head last year. After four years of aggressive expansion, the calf crops are experiencing year-over-year contraction on both sides of the border. Yearling supplies next fall are expected to be quite snug, which will spill over into higher calf values. Cow-calf producers know from past history that you have to be contrarian. If you’re thinking of liquidating or downsizing the herd, give it one more year.

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In addition to the higher beef production, beef demand is moving through a seasonal low. During September and October restaurant traffic slows down and retail beef consumption also eases. Feeding margins have been in negative territory over the past four months. As of early September, feedlot pen closeouts are in negative territory by $150 to $200 per head. It looks like we could see another couple or months of negative margins so this will weigh on the feeder market longer term.

Yearling prices have been red hot as of late with 850-pound steers trading at 52-week highs. According to Statistics Canada, the number of yearlings in Western Canada on cow-calf and backgrounding operations as of July 1 was down nearly 14 per cent from July 1 of 2018. Another factor contributing to the strong yearling market is the fact that feed barley prices have dropped nearly $80/mt from early July. Calf values have been relatively flat throughout August and the first half of September. Western Canadian calf numbers are about the same as last year. The fed and feeder markets have potential to be quite volatile over the next couple of months.

We may see further downside in the fed market before prices turn higher. U.S. fed cattle supplies during September and October are expected to be extremely burdensome, which will spill over into the western Canadian market. U.S. beef production will be at seasonal highs during September and October while beef demand moves through a seasonal low. This environment could cause the fed market to drop $10 from current levels. The lowest fed cattle prices of the year in Alberta are expected during the first half of October which could be as low as $125.

Holiday demand is coming

During November, the weekly slaughter pace will start to decline while demand tends to improve. Packers and retailers start gearing up for the holiday season which starts with the U.S. Thanksgiving. The market tends to percolate slowly higher between December and March. Once we move into the new calendar year, beef supplies start to tighten. I’m expecting the Alberta fed cattle market to average $155 in January and February and $162 in March.

It’s important that cow-calf producers have an idea of the price expectations for fed cattle because this will determine the price structure for replacements. We have a unique market situation for the feeder market. The number of yearlings (heifers and steers) on western Canadian cow-calf operations and backgrounding operations as of July 1 was 789,800 head, down 13.9 per cent from 916,800 head on July 1 of 2018. In Western Canada, yearling numbers are below year-ago levels while in the U.S., yearling supplies are actually up one per cent from 2018.

The futures market is trading near contract lows but Canadian yearling prices are near annual highs. The Canadian yearling market has divorced from U.S. prices and this will make it very difficult for feedlot operators to be profitable over the winter and spring.

Three main factors that will weigh on calf prices this fall. Currently, Alberta feedlot margins are deep in negative territory by $150 to $200 per head. It doesn’t look like the margin structure will turn around over the next couple of months. Secondly, the number of calves on finishing operations in Western Canada as of July 1 was up 7.6 per cent from July 1 of 2018. The drier conditions caused more calves to move into feedlots earlier. This will lower demand later on in fall. Finally, the fed cattle outlook for the summer of 2020 does not look favourable. We could see Alberta fed cattle prices dip to the $110 area, about $10 below the lows of 2019. The calf market needs to discourage production, which means the cow slaughter needs to increase.

Cow-calf operators should be aggressive with the yearling and calf marketings. Yearling prices only have one way to go with values at 52-week highs. Calf prices are expected to trend lower so that the U.S. cow-calf operator starts to liquidate the herd.

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