The cattle and beef markets appear to have many factors working in favour of higher values in the latter half of 2013. Low feedlot inventories and contracting meat production will occur while the U.S. economy moves into full-fledged expansion which should result in stronger prices for fed cattle.
Feedlots are currently carrying feeder cattle that were purchased approximately $20/cwt below year-ago levels and with lower feed grain prices in the fall period, we could see significant equity rebuilding in the feedlot sector. This will take some time to trickle down into the replacement market but feeder cattle prices are expected to trend higher throughout the fall.
STRONG POSITIVE INDICATORS
The overall economy will likely move into a major inflationary period over the next year as energy prices continue to climb higher. Equity markets are near record highs and there has been a tremendous amount of wealth made over the past year, which bodes well for consumer spending and beef consumption into the winter of 2013.
Alberta and Saskatchewan on feed numbers have been running three to five per cent below year- ago levels throughout the fall period. There is potential for a sharper year-over-year decline in the latter half of 2013 due to stronger feeder cattle exports to the U.S. Canadian feeder cattle and calf exports to the U.S. were running 61 per cent above last year from January 1 to June 29. Year-to-date Canadian beef production is running 10 per cent behind last year and this trend is projected to continue for the rest of 2013.
U.S. on-feed inventories as of June 1 were also down three per cent in comparison to June 1, 2012; July and August surveys are expected to show a similar year-over-year decline. Despite the lower on-feed numbers, beef production is coming in larger than earlier anticipated due to heavier carcass weights. Second-quarter beef production for 2013 was actually higher than last year and third-quarter production will only be marginally lower. The market moves into a major supply change in the final quarter of 2013 and first quarter of 2014. The supply situation appears to favour higher prices in the fed market from October through December.
I’ve mentioned in previous articles that the demand equation will be the main influence on the market structure moving forward. September and early October is a period seasonal low beef demand as restaurant traffic moves through a lull. However, retail consumption and restaurant traffic picks up in November and stays strong to the end of the year. I’m projecting this pattern again this year along with the macro environment, which will encourage overall beef consumption.
USDA data shows at-home food spending in May down 3.9 per cent from May 2012 while away from home food spending was up a measly 2.5 per cent. Official data is not available for June and July but I’m expecting at-home and away-from-home food spending to be slightly higher than last year during the summer months. This marginal year-over-year increase will continue into early fall but in November and December, as at-home food spending is expected to jump five per cent over 2012 while away-from-home food spending could be up 10 to 12 per cent. This should result in record-high wholesale beef prices which will translate into stronger fed cattle prices.
STRONGER U.S. ECONOMY
The U.S. economy is moving into a full-fledged expansionary phase unlike what we have seen in the past. Consumer confidence is at a five-year high and unemployment levels are expected to drop under the psychological-hump of seven per cent in the final quarter of 2013. Housing prices have jumped 10 per cent over last year making Americans feel more wealthy and with equity markets at all-time record highs, consumer spending is projected to increase in the final quarter of 2013 and first quarter of 2014 enough to stimulate a sharper jump in economic expansion. Interest rates are poised to strengthen and crude oil prices could reach $120 per barrel in the fall period as U.S. crude inventories decline. This will support the equity and cattle markets, which are all highly correlated during expansionary phases of the economy.
FEEDER PRICES UP
Feeder cattle prices have been trading $20/wt to $30/cwt below year-ago levels throughout the summer. Auction barns in Western Canada have been extremely quiet making the replacement market ill defined. Given the overall environment in Western Canada, we look to the U.S. market for price discovery and indications for the fall period. In early July, the USDA reported 740-lb. steer calves sold for $156.25 for October delivery in Billings Montana. Given the exchange rate and freight spread, this would make these cattle near $170/cwt in the Lethbridge area. In the U.S. Southern Plains, calves under 500 pounds are trading at $200/cwt for October delivery and heavier cattle weighing around 800 pounds are trading near record highs for fall feedlot placement. This provides a strong indication that feeder cattle will move through a fundamental price adjustment, which is due to the projection for abundant feed grain supplies. Given the crop conditions to date for U.S. corn and Canadian barley, there is potential for record crop size, which will keep feed grain prices under pressure throughout the fall period. †