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Cattle fundamentals remain healthy

Fed cattle prices in Alberta continue to hover between $168 to $172 due to tighter market-ready supplies, steady consumer demand and a weaker Canadian dollar. Cattle on feed numbers continue to come in below year-ago levels in both Canada and the U.S.

Cheaper feed grain prices have allowed feedlots to hold cattle and be patient with sales providing the upper hand in weekly negotiations. Positive economic data confirms an increase in consumer spending and a year-over-year increase in disposable income. Finally, weaker crude oil values and the stronger greenback have weighed on the Canadian dollar enhancing fed cattle and wholesale beef prices.

Feeder cattle values have been quite volatile over the past month, trading in a wide range from week to week. Average prices for calves and yearlings remain at historical highs but the market is discerning providing premiums for quality and discounts for stressed cattle. Barley prices have been percolating higher since the harvest period but this has done little to temper demand for feeder cattle as feedlot margins are very healthy. U.S. demand for feeder cattle in Manitoba and Eastern Saskatchewan will keep exports above year-ago levels over the winter period.

U.S. herd is expanding

Throughout 2014, U.S. quarterly beef production has been running sharply below year-ago levels and this trend will continue into the first quarter of 2015. The number of beef cows in slaughtered in the U.S. from Jan. 1 through Sept. 30 was 1.96 million head, down 400,000 head for the same period of 2013.

The number of heifers slaughtered for the same time period was 6.38 million head, down 600,000 head from 2013.

It is now clear the U.S. cattle complex is in the expansion phase, which causes an initial drawdown in supplies. However, it is important to note that for 2015, the year-over-year decline in beef production is only marginally lower than in 2014. Looking at past history, the sharpest decline in beef production is in the first year of expansion because in subsequent years, additional calves start to come on the market.

Quarterly pork production estimates show larger supplies in the fourth quarter of this year. For 2015, first-quarter pork production is estimated at 5.9 billion pounds, up from the 2014 first quarter of 5.8 billion pounds. Pork production during 2015 will be above 2014 in each quarter as higher hog prices have encouraged expansionary activity.

In Canada, from Jan. through Nov. 1, the number of heifers slaughtered was up 10 per cent over 2013 while the number of cows in the slaughter mix was down eight per cent. Total beef production for the first 10 months of 2014 was 843,127 mt, up two per cent from 823,188 mt during the same timeframe in 2013. Canadian beef production is actually above year-ago levels while the number of cattle slaughtered is up four per cent. Exports of fresh and chilled cuts of beef to the U.S. were 139,000 mt from January 1 through September 30, up 12 per cent from the same period of 2013. The U.S. is easily absorbing the larger beef production from Canada due to their lower production levels.

Good economic trends

Recent economic data from Canada and the U.S. remains in a positive trend. Canadian unemployment levels dropped to 6.5 per cent in October, which was a six-year low. The U.S. unemployment also fell to 5.8 per cent in October, also the lowest level since 2008. U.S. employers have added jobs for nine straight months and this trend will likely continue into December.

U.S. consumer confidence is now at the highest level since July 2007, which reflects that the economy is firing on all cylinders and consumers are optimistic about their future. It is important to realize that at-home and away-from-home spending surged in September and preliminary data reflects a similar trend in October. This is quite counter-seasonal because usually September and October are slower months for restaurant traffic and household budges usually tighten once school starts.

Now that the seasonally slower periods of consumption are behind us, November and December look positive for both at-home and away-from-home food spending largely due to favourable economics and optimistic outlook for the average household. Cumulative U.S. at-home food spending is running 3.7 per cent above 2013 and away- from-home food spending is up 4.0 per cent. Consumer financial health remains in positive territory to support retail and wholesale beef values at the current levels.

Feedlot margins in Alberta and Saskatchewan are in the range of $150 to $170 per head which has been the major factor driving the feeder cattle market. In the U.S. Southern Plains, feedlot margins are hovering just above $200 per head. Canadian feeder cattle exports to the U.S. from Jan. 1 through Oct. 25 were a whopping 342,000 head, up 45 per cent over last year. This is a significant factor sustaining the feeder market in Western Canada and the stronger margin structure and weaker Canadian dollar should cause this export trend to continue over the winter period.

Barley prices in the Lethbridge area were hovering at $188/mt in early November, up from the harvest lows of $155/mt. The fundamental structure for barley is historically tight for the 2014-15 crop year and I wouldn’t be surprised to see barley prices increase an additional $30/mt over the winter. This is a factor that could temper the strength in feeder cattle prices next spring as feeding margins come under pressure.

The year-over-year decline in U.S. beef production and stronger consumer spending is expected to keep fed cattle prices near historical highs into January. The market could see $5 swings on either side of current levels because of the extreme sensitivity to fundamental changes. Feeder cattle prices are expected to stay firm but rising barley prices could weigh on the market over the winter. Feeder cattle exports to the U.S. are expected to remain strong underpinning the western Canadian market.

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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