Feeder and fed cattle prices are poised to move higher based on lower beef production and steady consumer demand. The cattle markets are starting to incorporate a risk premium due to the uncertainty in production. Despite lower calf crops over the past couple years, North American beef production actually exceeded year ago levels during the first half of 2011. During the third quarter, production will remain above last year and then drop under year ago levels in the final quarter of 2011 and first quarter of 2012.
Packing margins have been very strong encouraging the weekly slaughter pace. Beef supplies have been building, adding pressure to wholesale prices. Ground beef prices continue to hover near record-high prices while “higher-quality cuts” have softened since peaking earlier in spring.
The increase in beef prices outpaced consumer incomes causing the retail market to ration demand. Consumer spending and disposable income will continue to be a major risk over the next six months. Unlike the fall of 2010, U.S. corn supplies are building rather than contracting, which should also bode well for feeder cattle prices and feedlot margins. Canadian feed grains are expected to stay rather tight but lower exports will limit the upside potential.
U.S. cattle on feed numbers have been running approximately four per cent above last year during the spring period and will only drop under year ago levels later in August. Placements during May were down 11 per cent in comparison to May of 2011, which is very important as analysts expect this trend to continue. Placements have been above year-ago levels every month since February of 2010. The May placement number is quite significant as a turning point in the supply equation of the market. Third-quarter beef production was increased on the last USDA report due to the larger on-feed numbers and softer corn values. However, notice fourth-quarter production down sharply from 2010 and 460-million-pound year-over-year decline in quarter one of 2012. Lower production prospects will keep the deferred live cattle futures very strong and we could even see the April live cattle 2012 futures contract make fresh highs.
2 6547 6715 n/a
4 6741 6460 n/a
Canadian beef production during the first half of 2011 was 568,250 mt, down 12 per cent from 496,636 mt last year. Production will continue to run under year ago levels and we could see further declines in the fourth quarter. Cattle-on-feed numbers in Alberta and Saskatchewan are running one per cent below last year which isn’t that significant. However, on-feed numbers are expected to be down four to five per cent from October through December. The Canadian dollar will continue to temper the weekly slaughter pace and also slow beef exports.
Beef demand has not come on as expected during the spring and summer. Abnormally wet and cool weather slowed retail beef movement and barbeque activity. Consumer confidence was also down in June causing restaurant traffic to slow. Overall consumer spending failed to rise in May causing the first decline in 10 months. The U.S. is undergoing a very slow level of growth and larger economic indicators are actually pointing to stagnant growth for the remainder of 2011. September and early October are seasonally bearish months for the equity markets and this could also temper beef demand during this time. US consumers are contending with larger inflation and a weak currency; therefore, all these factors suggest a decrease in food spending. The ongoing debate regarding the government deficit continues to limit business optimism. Restaurant owners are very concerned about personal and business spending in the fall period.
Feeder cattle numbers are expected to be down on the upcoming USDA inventory report. Drier conditions in the southern plains along with excessive moisture in northern regions have tempered the expansionary process. Canadian July numbers may show a marginal increase. Excessive moisture in Manitoba and Saskatchewan may offset the expansionary activity earlier in the year in Alberta.
In conclusion, I wouldn’t be surprised to see Canadian fed cattle prices strengthen $5 to $8 over the next six months given the price structure of the deferred live cattle futures.
The feeder market appears to encouraging expansion through higher prices, which should keep values near historical highs. When a market is at historical highs, there is usually increased volatility; therefore, producers are encouraged to have a prudent risk management plan in place. If the U.S. economy slips into another recession, the market could have significant downside risk.
GeraldKlassenanalysescattleandhogmarkets inWinnipegandalsomaintainsaninterestin thefamilyfeedlotinSouthernAlberta.For commentsorspeakingengagements,hecan bereachedat [email protected] or2042878268.
Quarter 2010 2011 2012
US QUARTERLY BEEF PRODUCTION (MILLION POUNDS)
1 6251 6411 5950
3 6768 6795 n/a
Total 26304 26266 25005