Mismatch between futures and forward delivery sales

This article was first published in Volume 4 Issue 3 of ABP Magazine (September 2024). Watch for more digital content from the magazine on ABP Daily.

Forward delivery feeder sales provide an indication of where prices may be heading this fall. It is also an opportunity to manage risk. Buyers who expect the market to turn higher during the fall run will purchase early with a deferred delivery date, while sellers who expect the market to move lower will sell early with a deferred delivery date. Year to date (week ending August 9) saw 171,000 head sold via electronic or satellite auctions in B.C., Alberta, Saskatchewan, and Manitoba. This is the third highest forward delivery auction volume on record, going back to 2013. Between the beginning of June and the middle of August, 56,000 head sold via electronic auction, accounting for 33 per cent of the year-to-date total. The only years that had a higher volume of cattle sell during this period were in 2021 and 2023 when summer drought pushed grass cattle to market early and producers were looking to manage their downside risk.

Light volumes of forward delivery cattle were moved in July, with around 8,500 head sold. Five-weight steers for October delivery averaged $397/cwt, while 500 pound steers for November delivery pushed above $417/cwt, steady and 7 per cent stronger than last year. During the first two weeks of August, around 12,000 head were sold via electronic auction for deferred delivery. Based on the first half of August sales, 550 pound steers for October delivery averaged $475/cwt, with November delivered steers averaging $474/cwt, 24 per cent and 26 per cent stronger than last year.

Feeder cattle futures have come under pressure int he last couple of weeks. Between August 1 and August 16, both October and November contracts declined $15/cwt, closing at $236/cwt and $235/cwt respectively. This may put a damper on forward delivery prices during the second half of August as feedlots adjust their expectations. Last year at this time, October and November feeder cattle contracts were either side of $251/cwt. Volatility in the futures market is expected to continue until after the U.S. election.

Based on the five-year average, 550 pound steers tend to peak in September just as the fall run gets underway. The July to September rally is 4 per cent , based on the five-year average, putting the projected price for Alberta 550 pound steers in September north of $455/cwt. October and November have historically been around 2 per cent softer than September, putting Alberta 550 pound steers near $449/cwt by October and $447/cwt in November.

Forward delivery sales appear to be pricing in more optimism for the second half of 2024, compared to the live cattle futures. Using the April 2025 live cattle futures (US$180.23/cwt) and a Canadian dollar of US$0.73, minus the April cash-to-future basis of -$2.81/cwt, puts fed cattle marketed in next April near C$244/cwt, suggesting calves being purchased on the electronic market are over $350/head in the red. Breakeven levels are closer to $405/cwt. Seasonality is anticipated to be the main driver of feeder prices this fall.