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By Brian Perillat, CANFAX
The Canadian cattle market continues to trend lower in 2016, and has been trending downward since peaking in the summer of 2015. Despite the fact that cattle markets have been through an extreme market correction, there continues to be caution moving forward. Although the majority of the price drop has already occurred, cattle producers could continue to see price erosion.. Growing cattle and beef supplies along with record large U.S. pork production is expected to keep pressure on prices. In addition, much like the Canadian dollar has a big impact on the Canadian market; the stronger U.S. dollar over the last couple of years has restricted the U.S. meat trade balance. U.S. beef exports are starting to slowly increase, but the stronger U.S. dollar combined with higher meat production will result in higher per capita meat supplies in North America, and therefore lower prices in order to work through the larger supplies. Globally, beef supplies have been slow to expand, but the global economy has not been particularly strong. In the longer term, a growing middle class and more open markets and less restrictive trade agreements will be important for increasing the value of Canadian exports. On a global scale, pork will continue to be a major competitor in the red meat market and continues to gain market share.
Over the last couple of years, the U.S. herd has expanded due to strong prices and good weather conditions, while the Canadian herd has generally stabilized. Given the large price correction, and an outlook that generally has a weaker market tone, expansion has slowed significantly in the US, and may possibly be done. Even if the U.S. were to stop its expansion, larger numbers of feeders outside of feedlots combined with larger upcoming calf crops means that cattle and beef supplies are expected to grow for at least another two years.
Meanwhile in Canada, herd growth appears to be limited over the next couple of years given the market conditions outlined above. Calf prices have fallen over $1/lb in the past year, which has been very disappointing for most producers, but Canadian calf prices remain historically strong. With a Canadian dollar under 80 cents, and an abundance of feed supplies, most cow-calf producers should have another profitable year.
Turning to calf price projections for the fall, there is always plenty of market information to provide a guide for projecting prices. Two important points to remember are 1) it is a guide, 2) it is constantly changing. The most transparent information to use is the Chicago Mercantile Exchange Cattle Futures. By taking the live cattle futures, converted to Canadian dollars, you can use this price and apply an estimated basis level and cost of gain in order to project the price of feeders and calves. For example, calves marketed this fall could be targeted for finishing next summer, therefore using the August live cattle futures (August 25th) of $101.125/cwt, and a September 2017 Canadian dollar of 77.525, this equates to $130.44/cwt (101.25/.77525). Using a historical basis of -7.5 would equate to a Canadian fed price next summer of $122.94/cwt. While this is a significant discount from current prices that are near $140/cwt, it points to more downside risk. Assuming a cost of gain of finishing at $0.85/lb, we can now estimate what a feedlot may be willing to pay for a calf this fall. If the calves finished weights are 1400 lbs, the feedlot will gross $1,721/hd (1400*$1.2294). If they are buying a 550 lb steer they will need to add 850 lbs at a cost of $722.50/hd ($0.85/lb*850). Therefore they would be possibly willing to spend $998.50 ($1721 -$722.50) or $1.82/lb for a 550 lb steer.
Understanding the Variables
There is a lot of focus put on the futures market when looking at the direction for prices, but there are other important drivers, especially for the Canadian industry. When considering calf prices, in addition to the futures, basis, Canadian dollar, and feed costs, production parameters are also very important in determining what a cattle feeder would pay for calves. As the market levels change, the impact of certain variables also changes, for example, at the peak, a one cent change in the Canadian dollar impacted calf prices by over $6/cwt. Now that change has dropped to about $4.50/cwt. Productivity and herd health also impact the value of different sets of calves. Projected finish weight impacts the value of a calf. A set of steers that is expected to efficiently finish at 1400 lbs, versus another set projected at 1350 lbs, is worth approximately $2.50/cwt more. The following table outlines some production and market changes, along with the corresponding price impact:
Price Impact on 550 lb steer
Live Cattle Futures
$0.50 per bushel
5% change in feed use
1 % (i.e. 1% vs. 2% DL)
A “+” sign means the calf prices move in the same direction as the change, and “-“ means they move in the opposite. For example, as the futures go up, so do calf prices, or if your calves have a full 1% lower death loss rate, calf prices go up $3/cwt.
By knowing your cattle and their performance attributes, along with understanding the changing market signals, it allows producers to take advantage of some marketing opportunities rather than simply being price takers.
For more ongoing cattle market information, please visit
Related Topics:Livestock; Farmers; Management
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