Fed cattle prices reached historical highs in January on strong domestic and export demand. U.S. and Canadian beef production during 2010 actually exceeded 2009 and this year over year increase will continue through the first quarter of 2011. Larger placements in the fall period will cause market ready supplies to increase later in spring. However, most analysts are forecasting a sharp drop in beef production during the second and third quarters which should keep prices well supported. U.S. domestic beef demand gradually improved through 2010 and this trend should continue. Rising consumer incomes in North America will the largest factor influencing beef prices over the next couple of years.
Offshore exports are now higher than pre BSE, which has also enhanced the price structure. Fed cattle in Southern Alberta touched the magical $100/cwt in late January while U.S. prices reached record highs of $108/ cwt. Feeder cattle prices will also stay firm given the healthy feedlot margins.
Backgrounding operators will start liquidating inventory in February, which will cause available supplies to increase. Feedyards are very current with production and values for replacement cattle should percolate higher into spring. The cattle market generally makes seasonal highs in late March or April and then prices tend to soften into summer. This year may be different because of the lower beef production in the second quarter and the growing demand scenario.
Cattle on feed in Alberta and Saskatchewan as of January 1 were 977,495 head, up a meager one per cent from January of 2010. December placements were near 122,000 head, up three per cent while marketings were 116,000 head, down 20 per cent in comparison to December of 2009. There was no surprise to the cattle on feed report because feeder cattle numbers increased in late fall. Cattle on feed 120 days or longer are rather tight which should enhance local basis levels.
First-quarter U.S. beef production will be slightly larger than last year, but year-over-year declines are expected for each subsequent quarter. Adverse dry conditions in the U.S. southern Plains caused feeder cattle to move off small-grain pasture sooner than normal. Higher prices also encouraged feedlot placements, which is the main reason for the short term increase in beef production.
However, there will be a severe drop in placement numbers in April and May, when these grazers usually come on the market. By July of 2011, the market should start to experience the effects of the lower calf crop in 2010 and there is potential for heifer retention. Notice the sharp drop in the final quarter of 2011 where beef production could be down 450 million pounds from 2010.
Beef production will also be down due to lower cow slaughter. This will be the first signal that the industry is moving into an expansion phase. Rising prices for bred cows and cow calf pairs has confirmed ideas that producers are going to start building herds.
U.S. eating and drinking place sales hit a record in December reflecting the improvement in restaurant demand. Consumers are starting to realize an increase in disposable income which results in greater food expenditures. This is a very positive signal as a one per cent increase in consumer income results in a one per cent increase in beef demand. U.S. December unemployment dropped to 9.4 per cent from 9.8 per cent in November. Equity markets have been making new highs which should underpin consumer confidence. U.S. and Canadian beef exports are now greater than pre-BSE and larger offshore movement is expected in 2011. South Korea is expected to cull 15 per cent of their hog and cattle herd. Australian exports are also expected to be down due to their adverse weather. Australia was a fairly large exporter to the U.S. last year and we expect less competition in 2011.
Retail prices for steaks and higher end cuts are still similar to July of 2009. Wholesale retail price spreads have narrowed and grocers are starting to feel the pinch. Wholesale prices have strengthened, but packing margins have fluctuated in and out of positive territory. There is a fair amount of pressure to curb the price strength for at home food expenditures. Pork and chicken production will also be larger in the first half of 2011.
Producers need to be conscious that demand is being tempered at the higher price levels.
Fed and feeder cattle prices should stay firm over the next three months. However, it may be prudent to look at price protection strategy that limits the downside and leaves the upside open. Producers don’t want to be holding expensive feeder cattle if the fed market eases later in the year. We have all seen how quickly markets can change within six months.
GeraldKlassenisananalystofcattle andhogmarketsinWinnipegandalso maintainsaninterestinthefamilyfeedlotin SouthernAlberta.Forcommentsorspeaking engagements,hecanbereachedat [email protected] or2042878268
US QUARTERLY BEEF PRODUCTION (MILLION POUNDS)