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Bloom fades on rosy cattle market

U.S. wholesale beef prices made 8 1/2-year highs during the first week of March and wholesale choice beef traded just over $198/cwt, while select reached over $195/cwt. Higher beef prices caused the fed cattle market to trade $130/cwt in the U.S. Southern Plains. Alberta fed cattle prices topped out at $117/cwt as the stronger Canadian dollar tempered additional strength.

However, wholesale beef prices came under pressure during the last half of March as demand failed to sustain the market at the higher levels. Packers continue to cut back on the weekly slaughter pace but this behaviour has done little to increase beef prices. Retailers are featuring pork and chicken in an effort to attract the consumer. Higher gas prices and other income constraints have limited consumer spending on food products and more specifically higher-priced beef.

Feeder cattle prices have been slipping lower throughout March due to negative feeding margins in Canada and the U.S. Higher feed grain price forecasts for summer have also put feeder cattle buyers on the defensive. Total U.S. cattle-on-feed numbers have been running above year-ago levels by two to five per cent throughout the fall and winter period. However, total steers and heifers only as of January 1 totalled 14.021 million head, which is only up 0.73 per cent in comparison to last year.

Supplies hold down price

Cows continue to make up 19.5 per cent of the slaughter mix but industry comments suggest that few U.S. cows are moving into feedlots. Longer term, this will result in lower ground-beef production and higher average carcass weights. Carcass weights were running at 788 pounds in mid March, up from 771 pounds last year. The higher carcass weights are causing analysts to increase beef production forecasts and this has also tempered the upside for fed cattle and beef prices.

The USDA increased second-quarter beef production estimates on the latest report. Given the larger on-feed numbers and higher carcass weights, there is potential for further upward revisions for the April through June timeframe. Larger-than-expected supplies will continue to weigh on the fed cattle prices.

In Western Canada, the number of steers one year and older on January 1, 2012, totalled 467,000 head on feeding operations, down 1.5 per cent from January 2011; heifers for slaughter were 325,000, up 3.5 per cent from last year. It is important to note the number of calves on feeding operations under one year old which were 376,000 head — up a whopping 19 per cent or 61,000 head over January of 2011. This is going to pressure the fed-cattle basis in Western Canada from May through August.

Tighter yearling supplies last fall cause feedlots to buy more calves. This is also resulting in lower demand for replacement cattle from major feedlots during March because these operations are carrying larger numbers from last fall.

More expensive burger

Ground beef prices are running 20 per cent higher than last year while the average consumer disposable income is only up four per cent from 2011. The USDA reported that “at home” food spending was up 4.6 per cent over last year and “away from home” food spending was up 8.9 per cent. It is difficult for consumers to spend more on beef products given the current income constraint. While North American beef supplies will decline in 2012, pork and poultry supplies will increase, causing consumers to switch to lower-cost protein. Restaurants are also starting to serve lower-valued cuts of meat and smaller beef portions.

The choice select spread has narrowed from $15/cwt in January to $4/cwt in March reflecting greater demand for lower valued products. The market is rationing demand at the current levels. U.S. feedlots have not experienced positive margins since April 2011. Western Canadian operations experienced positive margins last fall but periods of negative margins throughout the winter.

Looking forward, Alberta fed cattle prices need to exceed $121/cwt to breakeven in June given current feeder cattle values. U.S. corn stocks will drop to bin-bottom levels and the 2011-12 Canadian barley carryout will also be historically tight. Rising feed grain values will add pressure to the feeding margin structure.

In mid-March, a small group of medium flesh exotic steers weighting 573 pounds sold for $179/cwt in central Alberta. Charolais-cross steers averaging 686 pounds were $167/cwt landed in a southern Alberta feedlot. These are still very high prices but I believe the feeder cattle market will grind lower in the second quarter of 2012. †

About the author

Columnist

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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