Fed and feeder cattle prices have come under pressure over the past couple weeks as the market anticipates growing beef, pork and poultry supplies. The cattle complex is in a transition stage from contraction to expansion while pork and poultry have experienced production increases throughout 2015.
The demand picture has also turned softer. Canada is technically in a recession while U.S. economic growth has stagnated. The average consumer is experiencing lower disposable income while September and October are months when beef consumption tends to slowdown.
Feeder cattle markets across North America are feeling the effects of narrowing feedlot margins. U.S. feedlots are currently in red ink by nearly US$300 per head while Alberta margins are running $80 to $100 below profitable levels. Replacement cattle prices across the prairies are starting to grind lower with the deferred live cattle futures reflecting lower fed cattle prices in the winter and spring of 2016.
The Western Canadian grain harvest is in the final stages and the barley fundamentals remain historically tight for the 2015-16 crop year. The potential risk of higher input costs is also weighing on feeder cattle markets.
U.S. cattle on feed inventories as of September 1 were three per cent above over year-ago levels, which was somewhat larger than the industry anticipated. In addition to the larger on-feed number, carcass weights are running 22 lbs. above last year. Fed cattle marketings during August were down approximately six per cent compared to August of 2014. Cattle are being fed to heavier weights as feedlot operators hope for some recovery in prices. U.S. August placements were down five per cent from last year. The cattle on feed report has caused some minor adjustments in quarterly beef production estimates. U.S. beef production during the final quarter of 2015 will be similar to last year while sharp year-over-year increases are projected in subsequent quarters throughout 2016. Total beef production for 2016 is projected finish 1.4 billion pounds above 2015.
Expanding supplies of competing meats are also weighing on the beef market. Quarterly pork production has experienced year-over-year increases during most of 2015 and marginal increases are projected for 2016. U.S. broiler production is expected to finish near 40 billion pounds, up from 38.5 billion pounds in 2014. Next year, broiler production is projected to experience another sharp year-over year increase.
Cattle on feed in Alberta and Saskatchewan as of September 1 totaled 633,426 head, up three per cent from September 1, 2014. Placements during August were also three per cent above year-ago levels while fed-cattle marketings were down a whopping 10 per cent. Packers have been struggling to clean up market-ready supplies because exports to the U.S. of chilled and processed beef have slowed. At the same time, slaughter steer and heifer exports to the U.S from January 1 through September 5 were only 144,400 head, down 45 per cent in comparison to the same time of 2014. In late September, Alberta packers were buying fed cattle in the range of $180 to $182 while bids from processors south of the border were in the mid $170s.
U.S. wholesale choice product has been trading at US$230/cwt, which compares to US$246/cwt last year as U.S. beef consumption slows down. U.S. at-home food expenditures during August dropped below year-ago levels by 0.5 per cent. Away-from-home food spending continues to run above last year but has also eased over the past month. The main point is that demand is not growing but rather declining with retail beef prices near historical highs. Most consumers are facing a tighter budgets and lower disposable income that is having a negative effect on beef consumption.
Feeder cattle prices continued to trade near historical highs until mid September. Prices on all weight categories dropped by $10 to $12 as the deferred live cattle futures dropped to levels not seen since the fall of 2013. It is important to realize that 850 lb. steers entering the feedlot in September have a breakeven near $200 for January delivery. Given the current level of the February live cattle futures, Alberta feedlots can only expect a fed selling price of $180 in January and about $178 in April. Given the sharp year-over-year increase in first and second quarter beef production, it is difficult to justify a $20 rally between now and January so feeder cattle prices are expected to remain under pressure throughout the fall period. As noted earlier, feed grain prices also have potential to strengthen over the winter, which could further weigh on the feeder cattle market.
I’m expecting fed cattle prices to trade in the range of $178 to $184 for the remainder of 2015, which will keep feeding margins in Western Canada in the range of -$75 to -$125 per head. This will cause feeder cattle prices to grind lower throughout the fall period. Cow-calf producers will want to sell earlier rather than later in fall. Backgrounding operators need to be extremely careful because yearling price next spring could be about $10 to $20 below current levels. A prudent risk management strategy will be needed. The contraction phase is over and the market is now adjusting to growing beef supplies.