The temporary closure of the XL beef plant at Brooks, Alta. along with a firm Canadian dollar were the main factors limiting the upside in October. Fed cattle in Western Canada continue to trade in the range of $106/cwt to $108/cwt, similar to month earlier while the steers in the U.S. Southern Plains were selling at $127.50/cwt, up approximately $4/cwt from earlier in the month. U.S. packers are starting to anticipate larger demand in late November and December and wholesale beef prices are back up near historical highs.
Cattle-on-feed numbers are down slightly from a year earlier but U.S. feeder supplies remain tight, resulting in larger feeder exports to the U.S. The market appears to have renewed optimism for the winter and spring period, but consumer demand remains a large uncertainty. Fast-food sales are coming in lower then expected and consumer confidence remains sluggish. Consumers tend to increase consumption in November and December, but then spending contracts in January and early February.
U.S. cattle-on-feed inventory as of October 1 came in at 97.4 per cent of Oct. 1 2011 which was within analysts’ expectations. The number that caught the beef industry by surprise was the September placements figure, which was only 81.2 per cent in comparison to last year. This lower number comes on the heels of a 10 per cent year-over-year decline in feedlot placements during August.
In the short term, I’m looking for seasonal strength as packers prepare for the U.S. Thanksgiving but then the fed market may ease into December. U.S. fed marketing weights are nearly 25 pounds above last year, which has offset the marginally lower on-feed number. I don’t see a drastic change in the beef production estimate for the fourth quarter and the market is fairly comfortable with the nearby supply situation. However, beef production in the first and second quarter of 2013 may be down from current projections given the recent placement structure. April live cattle futures have been percolating near contract highs and the market appears to be incorporating a risk premium due to the uncertainty in production.
Canadian cattle-on-feed numbers are expected to run similar to last year during the fall and winter period. Once the XL plant is back on stream I expect Canadian beef production to be similar to year-ago levels. The Canadian weekly average slaughter during July and August was 52,000 head per week but has dropped to 35,000 head in October. I expect the slaughter to move back up to average levels later in December.
Price-conscious consumers have displayed very volatile spending behaviour. Fast-food sales are not as high as earlier anticipated and restaurant spending usually moves through a seasonal lows in September and October. Retail demand has been stagnant as ground beef prices remain near historical highs, but top-value steaks have had periods of weakness.
Packers are now preparing for the U.S. Thanksgiving weekend and wholesale beef prices are back up to historical highs. This has also translated into a firmer U.S. cash cattle market. Spending behaviour generally increases in December followed by contraction in January and February. Consumers temporarily going on diets also cause demand to ease at this time. By March, people are tired of winter and tend to head on vacation or at least treat themselves by eating out as the holiday debt has been brought down to manageable levels.
Looking at the North American economy in general, I don’t see much of a change over the next six months. Unemployment, disposable income and consumer confidence will likely remain rather flat which will keep the beef demand equation similar to last year.
The fed market may strengthen further in November but then stabilize in January and February. I’m looking for some higher values in March barring any adverse event to influence beef demand. The Canadian fed market will could edge higher up to the $112 in the short term and then trend up to the $120 level by mid-March.
Tighter supplies are influencing the feeder market more than the slaughter price structure. Despite record-high feed grain prices, calf and yearling values have been similar to last year with the U.S. market showing more of a premium. Winter wheat pasture is in good condition and many farmers in the Midwest have plentiful forage after silaging the poor corn crop. This may be skewing the feedlot placement number because the smaller farmer backgrounding operator is influencing the feeder market, whereas we haven’t seen this market influence for a number of years. Year-to-date Canadian feeder steer and heifer exports to the U.S. for the week ending October 6 were 111,183 head, up a whopping 69 per cent over last year.
A medium-flesh large group of 100 Charolais cross steers weighing 495 pounds sold for $174/cwt in mid-October. Black Angus heifers weighing 477 pounds traded at $166/cwt in southern Alberta at the same sale. Barley prices continue to edge higher and feedlots need $120/cwt to break even on feedlot cattle that will be marketed in November. The industry is experiencing equity erosion. This limits the upside in the feeder market in the short term.
One bright spot for feeder cattle is next fall and I’ll provide an early heads up. Corn prices will drop under $4. per bushel next September and feeder prices will move to fresh historical highs. Buying bred heifers or quality cows this fall may be the opportunity to capture good value longer term. †