Beef recall has impact on consumer spending

Fed and feeder cattle prices have come under pressure over the past few weeks as price conscious consumers back away from beef on the retail shelf. Beef consumption moves through a seasonal low from September through November on both the retail and restaurant level.


The beef recall due to the E. coli problem at the XL Foods packing plant in Brooks has been psychologically negative for the beef complex and it will take time for consumers to regain confidence in beef. Wholesale prices are struggling to move higher and packing margins are in red ink.


Alberta packers were buying fed cattle in the range of $106/cwt to $108/cwt in early October, down slightly from a month earlier. Cattle-on-feed numbers in Canada and the U.S. are similar to last year and heavier carcass weights may cause beef production to come in above year-ago levels in October and November. Fed cattle prices are expected to trade sideways to lower due to weaker demand and larger supplies over the next month.


From December forward, the market will start to adjust to lower cattle-on-feed numbers and stronger consumer spending for the winter and spring period. Fed and feeder cattle prices are expected to percolate higher in January through March.


Cattle on feed


Cattle on feed in the U.S. as of September 1 were 10.6 million head, down one per cent from September 1 of 2011; August placements came in at 2.2 million head, down one per cent from last year while fed cattle marketings were two million head which was a year-over-year decline of five per cent. The placements number was the second lowest since 1996, which should result in lower beef production from December forward.


Higher feed grain prices have done little to shorten feeding periods as dressed weights in the U.S. are running 16 pounds above last year. U.S. beef weekly output has increased over the past weeks but on the year is running two per cent below 2011. The number of cattle in the U.S. on feed 120 days or more has been abnormally high for this time of year and will likely decline only December. Higher numbers of market ready cattle and larger weekly beef output will continue to hinder fed cattle prices through November.


Unlike the U.S., the Canadian weekly average slaughter pace has declined in the fall, resulting in lower beef production. However, the temporary closure of the XL beef plant in Brooks has skewed recent data. On the year, Canadian beef production is only down one per cent from 2011 for the week ending Sept. 22. U.S. beef production is down a meagre two per cent so this is not significant enough to offset overall price structure. 


Canadian year-to-date (late September) exports of slaughter steers and heifers were 264,085 head, down eight per cent in comparison to the same period last year. Western Canadian feedlots are also backed up with market-ready cattle despite total on-feed numbers at seasonal lows.


Beef demand depends on consumer spending and highly variable to disposable income. Certain steaks are generally purchased by people with above-average income on the retail and restaurant level. Top-end cuts of beef tend to soften in September through November and then start to increase in December. Ground beef and lower-end cuts are bought by the general public and fast food restaurants; these cuts also have higher substitutability with pork and chicken. 


Feeder prices


Feeder cattle prices are about the same as last year. In early October, a small group of black medium-flesh steers weighing just over 600 pounds sold for $148/cwt in central Alberta. A group of Charolais-cross steers averaging 740 pounds moved at $144/cwt landed in a southern Alberta feedlot. Feedlot margins are in negative territory and most operators are factoring higher barley prices over the winter. Fed cattle prices need to rally over $120/cwt in November to break even, up from current levels of $108/cwt. Therefore, feeder cattle values will have difficulty moving higher given the current feeding economics.


For the week ending Sept. 22, Canadian year-to-date exports of feeder steers and heifers were 106,575, up a whopping 68 per cent over the same period of 2011. The U.S. market has been trading at a premium to western Canadian values, especially since winter wheat pasture is in fairly good condition. Stronger U.S. prices should underpin Canadian domestic feeder prices throughout the fall and limit any slippage in the market. 


However, keep in mind domestic demand is soft. If domestic feedlots experience significant equity erosion in the fall, there will be limited buying power in the spring. Cow-calf producers should sell increments of their feeder cattle over a longer period to diversify their marketing strategy. †


Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For comments or speaking engagements, he can be reached at [email protected] or call 204 899 8268.