As the US corn crop shrinks with the effects of the drought, it continues to lower Canadian calf and feeder price prospects. Although the rapid increase in grain prices have had the most dramatic impact on the cattle markets, there have been several factors that have been chipping away at Canadian prices the past few weeks and months. The additional key factors being the Canadian dollar, and fed basis levels, but other factors such as poor feedlot profitability, loss of US buyer interest in calves and feeders, and overall risk aversion in these markets will also negatively impact local calf prices. Over the last 2 months, the Canadian dollar has been trending upward (which started just before drought concerns hit the US corn market) and is a hindrance to Canadian calf prices. In the current market, as the Canadian dollar strengthens, (holding all other variables constant such as feed costs, futures prices, basis, etc.) for every 1 cent increase in the Canadian dollar, weaned calf prices should decrease approximately 3 cents/lb and vice versa.
Another significant change in the Canadian market this year has been the weaker fed cattle cash to futures and cash to cash basis. After very strong basis levels in 2011, the cash to futures basis so far in 2012 has averaged $5.30/cwt weaker than 2011. As feedlots forecast or contract fed prices to determine what to pay for feeders, weaker basis signals will reduce what a feeder will pay for calves, again holding all other variables constant. In the current market, for every $1 change in the basis, weaned calf prices should change approximately 2.5 cents per pound. Therefore, if the fed cattle basis was consistently $5.30 weaker, that alone could be impacting calf prices by over 13 cents/lb.
Looking at the attached sensitivity table, it shows the impact of a changing basis and cost of gain on calf prices. These show the purchase price of a 550 lb steer based on a $132.50 Live Cattle Futures and a par CDN dollar. Moving from a -$6 basis and $0.85 cost of gain to a -$10 basis and $1.05 cost of gain, the steer price drops from $1.89/lb to $1.49/lb or $220 for a 550 lb calf. This type of potential price shift will certainly disappoint many producers for the fall run, and reduce the incentive to start herd rebuilding. Looking at the current situation of tighter cattle supplies, an abundance of forage, and contracting opportunities to reduce basis risk, it appears calf prices would fall fairly close in line with prices from a year ago.