Fed and feeder cattle prices appear to be in transition. All the major factors that drove the cattle and beef complex to historical highs over the past quarter are slowly turning so that it will be difficult for the market to experience further significant upside. The U.S. economic expansion, which drove beef demand to unprecedented levels, is curtailing while overall North American beef supplies will slowly increase.
Feeding margins have been narrowing due to rising feed grain prices and a softer fed cattle market; therefore, feeder cattle prices are starting to come under pressure. It is expected feedlots will bid up the price of feeder cattle until there is no margin and with barley and feed wheat prices percolating higher, higher input costs are quickly eroding the profitability. The drought-like conditions across much of Alberta and Western Saskatchewan will likely cause the yearling run to start sooner this summer. Cowcalf pairs are also grinding lower due to rising hay and forage costs in Western Canada.
U.S. cattle on feed as of June 1 were 10.6 million head, which was one per cent above June 1, 2014. Feedlot placements during May were 1.7 million head, down 10 per cent from May of last year while fed cattle marketings during the same month were down eight per cent from year-ago levels. Overall, U.S. beef production during the second was down 188 million pounds from the second quarter of 2014. However, notice that from the third quarter onward, the USDA is projecting that beef production will exceed year-ago levels all the way through the end of 2016. Annual beef production for 2016 is expected to be up 726 million pounds compared to 2015. The main point is that the contraction phase in the beef complex is coming to an end.
Alberta and Saskatchewan cattle on feed for slaughter as of June 1 were 808,267 head, down nine per cent from June 1 of 2014. From January 1 through June 20, Canadian beef production was nearly 439,537 mt, down seven per cent from last year for the same period. Canadian basis levels could weaken due to the increase in U.S. production and slower export pace of frozen and chilled cuts.
The beef demand equation appears to be stagnating because the expansion phase of the U.S. economy appears to have peaked for the time being. U.S. housing starts during April were the highest since November of 2007, prior to the recession. This is a leading indicator of the economy and while we may see small gyrations in the housing sector, the main growth occurred from 2011 to the first part of 2015. Secondly, the U.S. unemployment rate during May 2015 was 5.5 per cent during May, under the long term average of 5.8 per cent and down from the peak of 10 per cent in October of 2009. When about 6.7 million people go back to work after being unemployed, beef demand increases.
Once again, the large change in employment levels has occurred and while we may see small variations from month to month, changes in beef demand will be minimal because the rate is under the long-term average. Finally, U.S. consumer confidence is also at similar levels to 2007 prior to the recession. Consumers are fairly confident about their income levels but further increases will not likely sway a significant change in restaurant spending.
The feeder market
Looking at the feeder cattle, the 2014 U.S. calf crop was 33.9 million head, marginally higher than the 33.7 crop in 2013. We will start to see the calves from the 2014 crop come on this fall. For 2015, I’m projecting the U.S. calf crop to reach 34.9 million head, up one million head from 2014. The contraction phase in the U.S. herd has come to an end and producers can expect an additional two years of expansion. The 2014 Canadian calf crop was nearly 4.6 million head and I’m expecting a similar number over the next two years. The larger U.S. calf crop will temper demand for Canadian feeder cattle South of the border, unless we see a significant deterioration in the Canadian dollar from current levels. Feed grain prices are percolating higher due to the lower Canadian barley and U.S. corn production.
U.S. quarterly beef production will experience year-over-year increases over the next six quarters. Beef demand is stagnating because U.S. economic expansion has peaked and average income levels are tapering off. Fed cattle prices will have limited upside from current levels and I feel the market will trade sideways to lower for the remainder of 2015. Feeder cattle prices also have limited upside because feeding margins are narrowing. A softer fed cattle market along with rising feed grain prices will pressure feeder cattle prices moving forward.