Alberta packers were buying fed cattle in the range of $168 to $170 in late March as the beef complex moves through a period of seasonal strong demand. While the market has strengthened considerably since the lows of $155 earlier in winter, feedlot margins remain in negative territory.
Break-even pen closeouts are closer to $195 so cattle feeders are underwater by nearly $300 per head. However, feedlots can see some light in the deferred positions. Steers weighing approximately 850 pounds have averaging $190 in central Alberta; forward contracts are near $165, which results in small margin near $40 to $60 per head. Feeder cattle prices have garnered support as feedlot operators look to recoup equity erosion over the winter.
Looking forward, there is a fair amount of uncertainty in the cattle market. Cattle-on-feed inventories are marginally above year-ago levels but carcass weights are sharply higher. Beef consumption levels will be key to sustaining the current price structure longer term. Recently, wholesale values have ratcheted higher as retailers look to maintain the beef pipeline. Retail beef prices have held value over the past year with the exception of sporadic weekly features. The consumer hasn’t seen any relief despite the 10 to 12 per cent year-over-year decline in cattle and wholesale beef prices.
The accompanying table shows the USDA estimates for quarterly beef production. Given the year-to-date beef production, we will probably see a downward revision in first-quarter beef production. I’m expecting the first quarter to eventually finish near 5.7 million pounds, which is very similar to last year. In the second quarter, we could see the sharp year-over-year increase come to fruition.
Feeder cattle outside feedlots last October were one million head above October of 2014 and these cattle are now moving off small-grain pasture into feedlots. I’m fairly comfortable with the USDA’s second- and third-quarter production estimates, especially if carcass weights stay near the current levels. The August live cattle futures are trading at a $17 discount to the April contract as the market factors in the larger supplies.
Canadian year-to-date beef production for the week ending March 5 was 168,000 mt, up five per cent compared to last year. Exports of Canadian feeder cattle to the U.S. for the first two months of the year were a measly 17,764 head, down a whopping 73 per cent from last year. Fewer feeders moving south will keep feedlot inventories above year-ago levels into the summer, resulting in the year-over-year increase in beef production. However, beef supplies will not become overly burdensome because exports of slaughter steers and heifers to the U.S. were just over 48,000 head, up 60 per cent from 29,978 head in 2015.
The weaker Canadian dollar was a major factor driving beef and slaughter cattle exports throughout the winter. We now find the Canadian dollar percolating higher. Canadian manufacturing hit a record low in December after five months of contraction. However, January data was surprising showing a jump of 2.3 per cent to $53.1 billion, which was a record high. The rebound in manufacturing has offset the slower energy sector. In any case, crude oil values are also up $10 from winter lows and the deferred positions are $2 higher. The lows in the Canadian dollar are likely in place and we could see further strength later in summer.
Food spending up
U.S. food spending has rebounded in 2016. At-home food expenditures have been running 4.1 per cent above last year while away-from-home food spending is sharply higher at 12.7 per cent. This year-over-year increase in food spending may sustain retail prices. Although restaurant spending generally eases in the summer, this data suggests we may not see the seasonal decline experienced in past years. Offsetting partial expansion in food spending is the sharp year-over-year increase in pork production. July and August and typically the lowest prices for hogs which tempers the upside in the beef complex.
The June and August futures market has factored in the larger beef production but this may be overdone due to the stronger demand in Canada and the U.S. Feeder cattle prices are expected to stay firm and could edge higher into May because the feeding margins are positive in the deferred positions. The Canadian dollar generally trends for a longer period of time and the momentum is definitely to the upside now that Eastern Canada manufacturing is surging and crude oil prices have bounced off the lows.