Fed and feeder cattle markets have been trending lower throughout the fall and early winter as the market contends with growing beef supplies and lacklustre demand. Alberta packers were buying fed cattle in the range of $158 to $160 in mid-December while pen closeout breakeven values are closer to $200.
Cold storage stocks of beef and pork are sharply higher than year-ago levels and wholesale beef prices remain under pressure. January and February are months of seasonally low beef demand, which is making it difficult to clean up the backlog of market-ready supplies in the feedlots.
Canada is in a full-blown recession and keep in mind we consume most of the beef domestically. Canadian consumers are overwhelmed with household debt and the high tax structure is slowing higher-end beef consumption. Feeding margins have been sharply negative since September.
Margins are negative
Earlier in fall, there was hope the market would recover which led feedlots and backgrounding operators to buy cattle without being able to lock in a profitable margin. However, the reality is setting in and feeder cattle purchases are now reflecting the profitability in the deferred months. Central Alberta prices for higher-quality 850-pound steers dropped below the magical $200 level in December with active trade from $184 to $189, which is down about $50 from year-ago levels.
U.S. feedlots are contending with a marginal increase in cattle-on-feed numbers. The year-over-year increase in the U.S. calf crop will continue to enhance feedlot inventories throughout 2016. Currently, feedlots in Canada and the U.S. are backed up with market-ready supplies and carcass weights are sharply above year-ago levels. Canadian exports of fed cattle to the U.S are running 48 per cent behind year-ago levels due to the burdensome supply situation.
U.S. beef stocks have been building in the final quarter of 2015 due to larger pork and poultry production. Pork production during the third was up over 500 million pounds in comparison to last year while fourth-quarter production was up 350 million pounds. Weakness in pork values has slowed beef consumption as consumers remain price conscious with rising household debt. Looking forward, U.S. beef production is projected to experience a year-over-year increase of nearly 300 million pounds in the first quarter of 2016, which will be followed by a 400-million pound increase in the second quarter. The market needs to move to low enough levels to encourage domestic consumption or offshore movement. The strong U.S. greenback has tempered exports to Southeast Asia where currencies have deteriorated.
Alberta and Saskatchewan cattle-on-feed inventories as of December 1 were up two per cent over year-ago levels while November placements were up four per cent. Canadian exports of feeder cattle to the U.S. are running 32 per cent behind last year and this trend will continue into 2016. Therefore, domestic Canadian feedlots need to absorb larger supplies of feeder cattle.
The Canadian beef market is feeling the effects of the recession with rising unemployment levels and lower consumer spending. Federal income is forecasted to drop sharply as the revenues deteriorate. Transfer payments to the provinces will be cut drastically in the New Year. Unfortunately, it looks like the worst part of the Canadian recession is yet to come and no amount of government stimulus will offset low oil prices and spending contraction. Tax hikes, rising household debt along with the surge in costs of imported goods will constrain the average consumer beyond imagination. Food inflation will be a hot topic in 2016.
The fed cattle market is expected to trend lower into February, which will spill-over into the feeder complex. I estimate it will take a couple months for feedlots to become current with market-ready supplies on both sides of the border. Rising beef production will temper any rallies. The market will likely overextend to the downside for both the fed and feeder cattle. Therefore, I feel the next opportunity will be to buy lighter-weight calves in early spring that will come on the market in the final quarter of 2016.
In the short term, I feel the feeder market could drop an additional $20 to $30 from current levels. Given the projected price of fed cattle, 800-pound steers Western Canada need to trade around $180 so that feedlots can be profitable. Cow-calf producers can expect the market to remain under pressure until we see prices come in line. After a prolonged period of negative feeding margins, feedlots typically abruptly back away from the market as equity erodes. We need to see one full round of feeding losses before the feeder market stabilizes. Cattle producers have once again realized how quickly and drastically the market can change within a short amount of time.