Klassen: Fed cattle market underpins feeder cattle prices

Alberta packers were buying fed cattle on a dressed basis at an average price of $275 delivered, which equates to $165 on a live basis. Fed cattle prices are now at 52-week highs and feeding margins are in the range of $50 to $70 per head. Strength in the cash fed cattle market was supportive for the feeder complex; however, weakness in the deferred live cattle futures capped buying enthusiasm in the mid-weight categories.

Western Canadian feeder cattle markets were lightly tested last week due to the holiday season. Prices for replacement cattle were relatively unchanged from week-ago levels. Heavier yearlings gained $2-$3 with feedlots aggressively shopping for shorter-keep cattle. Feeders that can be ready by late April or early May continue to trade at a premium relative to the longer-term production animals. For example, in central Alberta, mixed steers weighing 910 lbs. were valued at $191 while red mixed steers averaging 800 lbs. were quoted at $190; Simmental-based steers weighing 730 lbs. were only quoted at $192 in the same region which isn’t much of a carrying charge for the lighter-weight animal.

The March feeder cattle futures closed $2.13 lower last week while the August live cattle futures were down $1.10. The managed money funds were balancing positions for the year-end while commercial traders are spending time with their families. In central and southern Alberta, larger-frame medium-flesh steers weighing 650-700 lbs. were selling from $194 to $196 but similar quality steers from 600 to 625 lbs. were quoted from $204 to $207. This premium reflected the potential to place these feeders on pasture through the summer. There continues to be a bullish sentiment for the yearling market next fall.

Buying interest is brewing for grass cattle. Feedlot operators gave order buyers unconstrained instructions for ownership of feather-light calves. Sellers are starting to notice that these steers just under 400 lbs. are reaching up to $260-$270; steers weighing 500-525 lbs. are readily moving over $238.

The U.S. Department of Agriculture will release its final 2019 production estimates on Friday (Jan. 10). Ideas are that corn production will be down from earlier estimates. This could set a negative tone for the feeder cattle futures. At the same time, we don’t believe this rally in the fed cattle market is over just yet.

— Jerry Klassen manages the Canadian office of Swiss-based grain trader GAP SA Grains and Produits Ltd. and is president and founder of Resilient Capital, specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204-504-8339 or via his website at ResilCapital.com.