Market Update: Cow-calf producers should sell their feeders with the lofty futures and historically strong basis
By| Grain News
Alberta packers were buying fed cattle in the range of $151 to $153 on a live basis in mid-October, up approximately $10 from a month earlier. While Alberta prices have been percolating higher, fed cattle values in Kansas have hovered around US$111 on a live basis over the past four weeks. Market-ready supplies of fed cattle in Western Canada appear to be tightening due to lower placements earlier in the spring. This has caused the Alberta fed cattle basis to strengthen.
Yearling prices continue to trade near 52-week highs. Medium- to larger-frame average-flesh 850-pound mixed steers were actively trading in the range of $203 to $210 in southern Alberta. Drier conditions throughout the summer caused cow-calf producers to market feeder cattle sooner than normal. This means available feeder cattle supplies in October and November are lower than anticipated.
U.S. cattle-on-feed inventories continue to run five to six per cent above year-ago levels. It appears fourth-quarter beef production will come in 200 million pounds above last year; similar year-over-year increases are expected in the first three quarters of 2019.
In Kansas, the fed cattle market has hovered around $111 on a live basis which is similar to the average price during October of 2017. The year-over-year increase in demand has offset the rise in production resulting in a similar price structure. Restaurant spending during October and November is expected to finish 10 per cent above last year while retail expenditures are projected to be up three to four per cent.
While the U.S. market has traded in a sideways range, Alberta fed cattle prices have been ratcheting higher through October. I want to draw attention to the placement by weight category during March and April. During March, placements in the 600- to 699-pound category were down 9,467 head from last year; during April, placements in the 700- to 799-pound category were down 11,379 head from April of 2017. This has resulted in lower market-ready supplies of fed cattle during October.
The Alberta and Saskatchewan cattle market has actually divorced from the U.S. for the time being. Basis levels for fed cattle are abnormally high due to the abnormal placement schedule during February through March. Secondly, strong fed-cattle prices in October have caused the feeder cattle basis to also reach historical highs.
Signal to sell
For cow-calf producers, a historically strong basis along with feeder cattle futures near 52-week highs is a signal to sell your feeder cattle. I also want to point out that the April live cattle futures have traded as high as $125 in early October. Over the past year, the live cattle futures have $101 and $130. The risk/reward suggests that there is more downside risk than upside, especially with the year-over-year increase in production.
Backgrounding operators will want to buy price insurance on calves immediately upon purchasing. The March feeder cattle futures reached a high of $155 earlier in October but have since dropped to $148. However, over the past couple of years, the high in the feeder cattle futures has been around $160 but the lows are around $130. It’s prudent to have price insurance this year given the year-over-year increase in the U.S. calf crop. Barley prices are also $50/mt above year-ago levels. The risk reward scenario suggests further downside moving into spring.
The abnormal placement structure during March and April has caused Alberta fed cattle basis to be abnormally strong for October. Feedlots currently have positive margins which has enhanced buying power for replacements. Many cow-calf operators marketed feeder cattle sooner than normal, therefore feeder cattle volumes during October and November are below year-ago levels in Western Canada. These two factors have contributed to the historically strong basis for feeder cattle.
Finally, the April 2019 live cattle futures are trading near 52-week highs which has also caused the November 2018 feeder cattle futures to also trade within the yearly high. Cow-calf producers should sell their feeders with the lofty feeder futures and historically strong basis.
The current environment is also telling backgrounding operators to buy price insurance on their feeder cattle. When you assess the risk/reward, we could see significant downside in the feeder market. The June live cattle futures are trading at a $7 discount to the April contract due to the sharp year-over-year increase in second-quarter beef production.