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Beef Demand Turning Corner

Fed cattle prices in Alberta were in the range of $73 to $75 in late December, down nearly $5 from a month earlier. At the same time, prices in Nebraska were quoted at $78 on a live basis and $128 on dressed basis. The fed cattle market is functioning to encourage demand, but market signals are reflecting changing fundamentals are as we move into 2010. While supplies are expected to be marginally lower in 2010, there should be some noticeable improvements in domestic and offshore demand. North American consumer incomes are expected to increase next year and supplies of competing meats will decline resulting in an upward shift in the demand curve.

First quarter U. S. beef production is expected to be slightly lower than in 2009. U. S. cattle on feed reports reflect larger placements in the fall period, but these on-feed numbers will only come on the market in the second quarter. The April through June timeframe will result in U. S. beef production very similar to year ago levels. Canadian beef production in the first half of 2010 will be similar to 2009 as well. Lower feeder cattle exports resulted in similar on-feed numbers and with the larger carcass weights, we should see beef production stay relatively stagnant over the next six months. Total North American beef supplies for the first half of 2010 will be similar to 2009.

The U. S. market is starting to realize the effects of a weaker currency. Exports have improved in the fourth quarter of 2009 and are expected to be marginally higher than in 2008. Total 2010 U. S. exports are expected to reach two billion pounds which is above pre-recession levels. The weaker greenback and recovering economies in Japan and South Korea are important to achieve this export projection. U. S. beef imports will also marginally increase next year, largely due to lower domestic production. Australia has been picking up the benefit as Canadian beef exports to the U. S. are similar to year ago levels.

The weaker U. S. dollar or stronger Canadian dollar has made our local cattle more expensive to U. S. buyers. However, we have seen a recovery in Canadian slaughter cattle exports and this is expected to continue into the first quarter of 2010. The Canadian slaughter also expected to run very similar to year ago levels over the next three months; however, this is somewhat dependant on carcass weights, which are still 30 pounds above last year.

Decreasing supplies of pork will result in less competition for beef on the retail shelf. Total U. S. red meat production should be down 2.5 per cent in 2010. The sharpest drop in pork will come in the first quarter so this should bode well for the beef complex. Hog prices in the major U. S. markets are now above pre-recession levels so hog complex has almost recovered.

Unemployment rates are expected to decline in 2010; consumer confidence should continue to improve and overall consumer spending should increase causing beef demand to strengthen. A one per cent increase in consumer spending results in a one per cent increase in beef demanded. Canadian AAA prices have been hovering near two-year lows partially due to an increase in the Canadian dollar but also weak North American beef demand. After the 1983 recession, U. S. unemployment dropped by 2.5 per cent and the GDP improved by five per cent in the first 12 month period of expansion. The demand situation is turning a corner, but it will take some time to trickle down to the cattle market. The cattle market will only experience a significant shift in domestic demand in the second half of 2010.

The fed cattle market should move into a bottoming formation in January and early February. Prices are expected to strengthen in line with the seasonal tendency in March. The extent of the price upside will be determined by consumer confidence. Demand from tier two and higher-end restaurants needs to improve to sustain any type of price strength.

Earlier in the fall, I thought the feeder market might recover in December, but replacement cattle will remain under pressure into February. Sharply lower feeder exports to the U. S. along with poor margins in the finishing feedlot sector will continue to weigh on prices. Until feeding economics start to improve, it will be difficult to forecast higher prices for the feeder market. Many cow calf producers have been holding back on sales and this is usually a negative price signal. I’m expecting a surge in feeder cattle supplies over the next couple month.

Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For questions or comments, he can be reached at [email protected]or 204 287 8268.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.

About the author

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Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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