Feedlot operators in southern Alberta are cautiously optimistic moving into the major fall sales run of yearlings and calves. Alberta packers were buying fed cattle in the range of $118/cwt to $120/cwt in mid-September, which is slightly above breakeven for most pen closeouts.
After a very difficult financial period over the past 12 months, feeding economics appear to be slowly turning positive for the fall and winter. Feed grain prices remain under pressure and deferred live cattle futures are slowly trending higher which should bode well for margins given the current feeder cattle prices.
The economy appears to be improving and restaurant traffic is poised for stronger volumes longer term. Wholesale beef prices have stayed firm but with tighter beef supplies projected over the winter, packer margins are projected to improve which should translate into higher fed cattle prices and spillover into the feeder market.
GOOD SUPPLY OF FEED GRAINS
Yield reports from Western Canada are higher than expected and abundant feed grain supplies are expected to keep input costs under pressure. There are a fair amount of risk supporting the cattle market moving forward but there remains a sense of caution in the feeder complex. Feedlot managers don’t want to bid up replacement cattle until positive margins have been realized for a few months. The industry needs to experience some equity rebuilding in the feedlot sector to sustain and justify higher feeder cattle prices.
U.S. cattle-on-feed inventories as of August 1 were 10 million head, down six per cent from August 1, 2012; placements during August were reported at 1.9 million head, down a whopping 10 per cent in comparison to last year. The drought of 2012 caused an abnormal placement schedule but 2013 is turning back to a more normal seasonal pattern given favourable pasture and forage conditions. However, the industry is anticipating a year-over-year decline in on-feed numbers through the winter given the lower available supplies of feeder cattle.
The USDA has fine-tuned its beef production estimates for 2013 and 2014. Second-quarter beef production in 2013 was actually higher than last year. A year-over-year increase is also expected in the third quarter of 2013. This is a major change in the supply equation and has kept fed cattle prices relatively stagnant through the summer and early fall period. However, a year-over-year decline in production is expected in the fourth quarter of 2013 and then a sharper drop is projected in the first and second quarters of 2014.
Live cattle futures for April and June of 2014 have potential to incorporate a risk premium due to the uncertainty in production. In the accompanying table note the lower beef production projection for the final quarter of 2014, which would be the smallest in the last five years. The caveat on these numbers is actual carcass weights. Lower corn prices could result in additional pounds on each carcass.
While the supply situation is expected to tighten, the demand equation appears to be steady and will mildly improve in line with the seasonal tendency for food expenditures. In July, U.S. at-home food spending was up six per cent while away-from-home spending was only up a marginal 3.5 per cent. The main factor driving restaurant traffic for quick-food and full-service restaurants is the amount of disposable income for the average consumer.
July data shows U.S. disposable income was only up 2.2 per cent in comparison to July, 2012. Average U.S. ground beef prices in July were up 11.8 per cent over July 2012 but retail sirloin steak values were down 3.3 per cent. Clearly, consumers continue to shy away from higher-valued product in favour of lower-cost beef. This is a main factor influencing the value of the carcass. Looking forward, this trend is expected to continue as price-conscious consumers are struggling with inflation running at two per cent. Looking at the seasonal pattern of spending, consumers generally eat and spend more on food in November and December, which should keep beef demand stable to slightly higher in the final quarter of 2013.
I’ve been fairly optimistic for feeder cattle prices in previous issues. Larger Canadian and U.S. corn crops are confirming earlier price projections for replacement cattle as feeding margins start to improve and look positive over the next four- to five-month period. Feeder cattle in U.S. auction markets are trading near record highs and have been leading the Canadian market. Feeder cattle exports to the U.S. are running 72 per cent above last year. However, now that feedlot margins are more favourable in Western Canada and feeding efficiencies are more comparable, the export pace may ease later in fall. I’m expecting prices for feeder cattle to climb by $10/cwt to $15/cwt over the next six months.
Feedlot margins are currently in positive territory and are expected to improve in the final quarter of 2013 and first quarter of 2014. While feed grain prices are trending lower, feeder cattle prices are projected to percolate higher. Fed cattle values are expected to remain stable until early November and then ratchet higher into the spring period. Consumer incomes remain relatively stagnant which will limit the upside in fed cattle prices. †