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Fed cattle market reaches historic highs

Strong demand for beef continues and cattle herd isn’t expanding quickly

Alberta packers were buying fed cattle in the range of $198 to $200 cwt in April, which was a historic high. Lower energy values and stronger economic growth continue to cause a year-over-year increase in food spending. Disposable income for the average consumer has been ratcheting higher and unemployment levels are improving moving into the summer grilling season.

Retail beef prices have been percolating higher but this has done little to stem North American beef demand. U.S. consumer confidence continues to climb, which suggests beef demand will remain robust throughout the second quarter of 2015.

Inflation expectations have diminished, which reflects consumers may consider beef affordable, which is a positive signal for the beef complex.

First-quarter beef production came in lower than anticipated; however, subsequent quarterly production is expected to exceed year-ago levels. Healthy feedlot margins have enhanced feeder cattle prices and cow-calf producers have been able to forward-contract yearlings for fall delivery at favourable values.

While the Canadian cattle herd remains in contraction phase, overall calf supplies south of the border are expected to be similar to last year. Canadian feeder cattle exports to the U.S. continue to exceed year-ago levels as the exchange rate remains near six-year lows.

Production increasing

There were 10.66 million U.S. cattle on feed as of March 1, down one per cent from last year. Despite the lower on-feed number, beef production is expected to show modest year-over-year quarterly increases in subsequent quarters for 2015. This is largely due to heavier carcass weights which are running 25 pounds above last year. Weaker feed grain prices have caused producers to add more pounds on each animal. If adverse growing conditions materialize in the U.S. Midwest, this scenario will change and could result in a major shift in production economics. This is something to watch over the summer because feedlot placements have been sharply below year-ago levels thus far in 2015.

U.S. quarterly beef production

Numbers down in Canada

Alberta and Saskatchewan cattle on-feed inventories as of March 1 were 866,000 head, down 12 per cent from last year. Lower on-feed numbers have resulted in a year-over-year decline in Canadian beef production. Canadian year-to-date beef production for the week ending April 11 was 269,000 mt, down five per cent from last year for the same period. It’s interesting to note that live cattle exports to the U.S. from January 1 to April 4 were only 68,000 head, down 44 per cent from last year while exports to the U.S. of fresh and chilled cuts were up 16 per cent. This suggests that the Canadian market is reflecting a premium over U.S. values for live cattle to stem the export tide.

U.S. consumer away-from-home (restaurant) food spending was up 9.5 per cent in January and up 6.8 per cent in February. However, March data showed a year-over-year reduction of 4.7 per cent. This is very counterseasonal consumer behaviour, which I believe shows the healthy financial prospects of the average U.S. household. Consumers were spending more on food (above inflationary rates) at a time when they generally preserve income.

At-home food spending has been running very similar to last year during the first three months of the calendar year. The U.S. economy is realizing the effects of lower energy prices, which causes a rise in disposable incomes. Beef demand could experience a moderate growth pattern during the summer months, which will keep wholesale beef and fed-cattle prices relatively stable.

Canadian and U.S. calf supplies will be similar to last year during the summer and fall period. The 2014 U.S. calf crop was up a meagre 0.5 per cent from 2013. The industry has experienced a marginal increase in heifer retention, which is barely sufficient enough to offset cow culling rates. U.S. producers do not appear anxious to expand their herds with record high prices for breeding heifers. The 2014 Canadian calf crop was estimated at 4.6 million head, up four per cent from the 2013. Higher prices have not encouraged heifer retention in Canada but rather keeping the herds at similar size. Canadian feeder cattle supplies will likely remain constant in 2015 with a calf crop of 4.6 million head. Look for the feeder market to remain in an upward trend.

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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