Originally published on June 6, 2024 on Canadian Cattlemen.
By Jerry Klassen
World Animal Foundation has updated the statistics on May 29, 2023.
I’ve received many inquiries over the past couple of months about the price outlook for feeder cattle. Many analysts focus on feeder supplies and use this to determine their view or perspective of the market; however, we all know there are additional factors that affect price direction. Corn and barley prices, exchange rates, feeding margins along with the overall price of fed cattle can also become significant influences on feeder cattle prices. In this issue, I’m going to discuss a few factors that cattle producers should monitor to help determine their marketing strategy.
According to the USDA, the U.S. calf crop for 2023 was estimated at 33.593 million head, down 872,000 head from the 2022 output of 34.365 million¹. To put this in historical perspective, the 2024 calf crop was 33.522 million head. The total supply of calves is similar to 2014; however, the marketing behaviour is different from 2014.
To this we look at feeder supply outside finishing feedlots. The USDA’s April 1 survey had feeder cattle outside finishing feedlots at 18.866 million head, down 766,000 head from April 1, 2023, and down 636,000 head from April 1, 2014. This is a historical low.
In Western Canada, feeder cattle supplies as of April 1 on backgrounding and cow-calf operations is projected to be 2.612 million head, down about 84,000 head from April 1, 2023. We start with the January 1 numbers from Statistics Canada and account for placements, imports and exports to come up with this number. It’s an estimate but it helps indicate the available supply.
When supplies are historically tight, the feeder market functions to ration demand and encourage expansion. This usually results in heifer retention which further tightens the available supply of feeder cattle. More importantly, this market environment causes finishing feedlot margins to move into negative territory. During 2015 and 2016, there was a period of 16 months in a row when feeding margins were negative. During the summer and early fall of 2015, U.S. feeding margins were negative $500 per head. The finishing feedlot had no chance to lock in a margin during this period of negative margins when the cattle herd was moving through a significant expansionary phase. Usually, the finishing feedlot needs to experience about eight to 12 months of negative margins before the feeder market experiences a significant shift.
Cow-calf producers and backgrounding operators need to be aware of the fed cattle fundamentals. Basis risk or variation in Western Canada can be larger than the price variation of the futures market during the fall and winter. Packers in Canada and the U.S. can purposely curtail the slaughter pace to enhance wholesale beef prices. This works for a period but usually can’t be sustained long-term because of the competitive nature of the market. There are also seasonal patterns to beef demand. Beef demand is inelastic so a small change in supply can have a large influence on the price. Even with lower beef production, feeding margins won’t necessarily be profitable.
The price of feed grains is the third major factor influencing the feeder market. U.S. corn production is expected to finish near 363 million tonnes, down from the 2023 output of 390 million tonnes and down from the five-year average of 365 million tonnes. While corn fundamentals are expected to tighten, barley supplies in Western Canada should be sufficient to easily satisfy domestic feed usage. Canadian barley production for 2024 is estimated at 9.8 million tonnes, up 900,000 tonnes from the 2023 output. Western Canadian feedlot operators should have a competitive advantage over their U.S. counterparts when it comes to inputs. This should result in a year-over-year decline in feeder cattle exports to the U.S. Again, keep in mind that the Alberta fed cattle basis can move to a sharp discount to the U.S. fed cattle basis during the late fall and winter. This may offset the feed grain cost advantage in Western Canada.
In conclusion, the North American calf crop dropped near 10-year lows in 2023. Feeder cattle supply outside finishing feedlots as of April 1 is expected to be extremely tight. When the feeder market is functioning to encourage production, feeding margins for the finishing feedlot can be negative for an extended period. Alberta fed cattle prices during the late fall and winter can be significantly lower than Nebraska values. This may offset the feed grain price advantage for feedlots in Western Canada for the 2024/25 crop year.
There are many factors influencing the feeder cattle market. One thing we know for sure is that producers should expect significant volatility over the next 12 to 16 months. When a market is at historical highs, the price volatility within a short time can be extreme.
¹This statistic has since been updated by the World Animal Foundation with the most recent estimation equaling 33.8 million, a 2% decrease from 2023.