Fed cattle prices continue to trend lower in the second quarter due to weaker beef wholesale prices and larger-than-expected production. Texas fed cattle traded as low as $119/cwt in late April, which is down $11/cwt from the March highs. Alberta slaughter cattle have also been under pressure trading $109/cwt to $111/cwt, down $8/cwt in comparison to late spring.
Packing margins remain in negative territory and there is the risk of plant shutdowns in the upcoming months. March and April have been the most difficult months on record for the packing industry. The negative media hype regarding ammonia-treated ground beef has resulted in a sharp decrease in demand. Wholesale choice beef traded at $177/cwt in late April, down from the highs of $197 in late February; select beef was also quoted at $177, down $10/cwt from late March.
Second-quarter beef production is coming in larger than expected due higher carcass weights. Producers have been holding back on sales but this is price negative longer term. All commodities and equity markets have come under pressure since early March and the speculative funds have been major sellers of live cattle futures. Feeder cattle prices have softened due to weaker fed cattle values and higher barley prices. Alberta feedlots are carrying larger number of fall placed calves which has limited their demand for replacement cattle. Negative feeding margins in Western Canada and in the U.S. will keep feeder prices under pressure over the next couple months.
U.S. beef production estimates are coming in higher than earlier projections because of the heavier carcass weights. Cattle-on-feed numbers are running two to three per cent above last year but the year to date slaughter pace is five per cent behind year-ago levels. Therefore, at some point late in the second quarter or early third quarter, the slaughter pace has to catch up last year. This will also cause the USDA to increase third-quarter production estimates. It is important to note that while 2012 beef production forecasts are down from 2011, quarterly pork production is up by nearly 100 million pounds each quarter compared to last year.
I’m comfortable with the production estimate for the fourth quarter because placements will likely drop under year-ago levels in late spring and summer. This will tighten market-ready supplies in October and November. Producers should also remember that fed cattle made seasonal highs in early November and the market environment is setting up for a similar price pattern.
Cattle-on-feed numbers in Alberta and Saskatchewan are running similar to year ago levels. The number of cattle slaughtered is only down one per cent so slaughter data is in line with the on-feed numbers. It is important to realize that average carcass weights are 881 pounds compared to 851 pounds last year which reflects that feedlots are holding back on sales. Year-to-date slaughter steer and heifer exports to the U.S. for the week ending March 24 were 96,451, down 16.3 per cent from 115,278 head last year. Lower exports also confirm the backup with on-feed numbers the same as last year. There is going to be pressure on the basis in May and June. It will be difficult to increase fed-cattle exports given the backlog of market ready supplies in the U.S.
Beef demand remains sluggish despite the warmer temperatures. Demand for ground beef is down an estimated 15 per cent to 20 per cent given the negative media hype regarding ammonia-treated lean textured beef. Beef producers also need to be aware that average consumer income has actually deteriorated in 2012 when accounting for taxes and inflation. While beef products are still near record highs on the retail shelf, pork and poultry products are actually cheaper than last year.
Fed cattle prices are expected to trade in a sideways range over through the summer period. In fall, prices could percolated higher but this will largely demand on the overall economic situation and consumer spending.
Feeder cattle prices are expected to stay soft through the summer. The barley carryout for the 2011-12 crop year will be historically tight which will cause the feed grains complex to stay firm in Western Canada. Feedlots need a breakeven price above $120/cwt for fed cattle in late spring and summer and with the current market at $109/cwt, feeding margins will stay in red ink.
At the time of writing this article, feedlots are holding fed cattle that were sold over two weeks earlier. Some backgrounding operations are holding 850-pound cattle that were sold three weeks earlier. There is a backlog through the system and which eventually trickles down to the feeder market. Negative feeding margins, higher barley prices, and the current cattle backlog will continue to set a negative tone in the feeder market. †