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Demand Keeps Prices Strong

North American cattle prices continue to trade near historical highs. Despite an increase in beef production, stronger domestic and export demand has caused fed and feeder cattle prices to trend higher throughout the winter. Alberta slaughter cattle have traded in the range of $106/cwt to $108/ cwt during February. At the same time, fed cattle in the U.S. Southern Plains have sold for $108/cwt to $110/cwt. Retail beef prices reached historical highs which is a positive signal moving forward. Greater consumer demand at the retail and restaurant level should sustain the current price structure moving into the summer timeframe.

Positive feedlot margins have caused feeder cattle prices to surge. Strong buying interest from major feedyards in western Canada has limited feeder cattle exports. Prices for bred heifers and open heifers for beef cow replacement are also moving higher, which is a signal the expansionary process is in the beginning stages.

U.S. NUMBERS UP

The number of U.S. cattle on feed as of February 1 was 11.5 million head, up five per cent in comparison to February 1 of 2010. January placements were 1.897 million head, up four per cent from year ago levels while marketings were 1.8 million head, the same as last year. This report was considered neutral for the market as most analysts had expected the increase in placements and on feed numbers. The recent snowfall has resulted in minor inefficiencies in weight gain but carcass weights are running at 781 pounds, up 10 pounds from last year. It now looks like first and second-quarter beef production will exceed earlier expectations causing the market to rely on demand to sustain prices through the seasonal downtrend in the summer months. For the week ending Feb 20, U.S. year to date beef production was very similar to last year at 3.5 billion pounds. Given the earlier placements, analysts are now forecasting a sharp drop in third and fourth quarter U.S. beef production.

WEST DOWN SLIGHTLY

Alberta and Saskatchewan on-feed numbers as of February 1 were 917,000 head, down a meager three per cent from last year. January placements dropped sharply to 90,000 head, down a whopping 28 per cent from January of 2010 and marketings were 144,000 head, which was up two per cent from last year. Adverse winter conditions during January resulted in slower auction market sales so the lower placement number was anticipated. Alberta carcass weights were 831 pounds in mid February, down from 862 pounds from February of 2010. Western Canadian feedlots are very current with production which should result in stronger domestic basis levels in the March timeframe. Canada fed cattle exports to the U.S. have been running over 12,000 head per week, draining off excess supplies from the domestic market. Canadian beef production for the week ending February 12 was 123,000 mt, down nearly seven per cent from last year. Statistics Canada reported total inventory of 12.5 million head as of January 1, down 3.4 per cent from last year and the lowest number since 1995. Beef cow numbers dropped 2.7 per cent, continuing the contraction phase that started in 2006 but beef cow replacement numbers were up three per cent. The 2010 Canadian calf crop was 4.886 million head, down marginally from 4.958 million head in 2009.

MORE BEEF AT HOME

U.S. January at-home food expenditures was up 4.4 per cent over January of 2010; this is a surge in demand because December at home food expenditures was down 4.4 per cent from December of 2009. Away from home food expenditures for January were up 2.3 per cent from year ago levels following an 8.1 per cent jump in December. Domestic demand is clearly higher on both the retail and restaurant level. Grocery store prices were also up 0.7 per cent so this is partially responsible for higher spending.

January retail beef prices were at an all time record high and this reflects that consumers are comfortable with the market structure. Disposable income for the average consumer is expected to increase throughout 2011 and then stagnate in 2012. This is a key factor for domestic beef demand. The function of the retail beef market will be to ration demand through higher prices resulting in lower per capita beef consumption. When U.S. retail prices level off, this will be a signal the cattle price rally has come to an end.

PRICES STAY FIRM

Feeder cattle prices are expected to stay firm into the summer months. We may see volatile fed cattle prices in March but feedlots will be hesitant to pay higher prices. Keep in mind 700 to 800 pound steers are 30 per cent higher than last year. We have seen a rebuilding in feedlot equity but looking at past history, feedlots usually buy approximately 20 per cent to 25 per cent fewer feeder cattle as buying power per animal decreases. Barley prices are ratcheting higher and wheat stocks are also tightening in Western Canada. Barley acres could be down 10 per cent in 2011 and higher feed grain prices may also temper the upside in the feeder cattle complex longer term.

GeraldKlassenanalysescattleandhogmarkets inWinnipegandalsomaintainsaninterest inthefamilyfeedlotinSouthernAlberta.For commentsorspeakingengagements,hecanbe

reachedat [email protected] or2042878268

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