In the previous issue, I mentioned that producers should look at expanding or rebuilding their cow herds this year. The price outlook is positive for calves and feeder cattle from here forward. However, the outlook is constrained by the economic uncertainty and is based on the economy turning around in 2010. The function of the market will move through a transition stage. We have been discouraging beef production but in 2010 the market will function to encourage production. This has potential to result in very strong feeder cattle prices. It usually takes about two years of higher prices for the U. S. cow-calf producer to respond to the price signal. Therefore, it is prudent for the Canadian producer to get a head start of their U. S. counterpart and start rebuilding when bred heifers and cows are reasonably priced.
Negative margins for the finishing feedlot sector, slumping beef demand and poor returns for the cow calf producer has resulted in contraction of the cattle herd on both sides of the border. We are going to see smaller cattle herds, reduced calf crops and less cattle moving through feedlots. All these factors will result in lower U. S. beef production in 2009, 2010 and potentially 2011. Lower supplies should result in higher calf prices longer term.
The industry has experienced a sharp rise in cow slaughter over the past two years. This will likely decline this year, although the dairy cow slaughter will remain strong in the U. S. The lower cow slaughter in 2009 and 2010 should result in lower beef production. The industry is counting on heifer retention to start in 2010 and be more aggressive in 2011.
Supplies of competing meats, poultry and pork will contract this year and will likely remain stable in 2010. However, the U. S. domestic market will be contending with larger supplies of all meats in 2009. Offshore exports of poultry, pork and beef should rebound in 2010 resulting in lower supplies for the domestic North American market. The U. S. beef export program has not recovered to levels before BSE. There is potential to the U. S. to increase beef exports by nearly 400 to 500 million pounds per year as political barriers are removed. If the export program recovers as expected, the domestic market will be contending with lower supplies as the U. S. economy moves into expansion. This should result in higher prices of fat and feeder cattle. It is only a matter of time before all beef producers in Canada and the U. S. incorporate age verification and traceability into production practices.
Food security has become a major issue over the past couple years. Food prices have become highly correlated with energy values as ethanol and biodiesel production consume a larger portion of coarse grains and oilseeds. The tightness in the world wheat market resulted in record high prices last year. Despite the stocks increasing to record levels in 2008-09, the wheat futures market is still near historical highs. (Excluding last year’s price rally). Corn prices are still relatively strong from a historical perspective considering the U. S. carryout projection of 1.7 billion bushels this crop year. Barley prices have potential to move up to record highs in 2009-10 due to lower seeded acreage. Corn values will also be volatile during summer and will likely incorporate a risk premium due to the uncertainty in production. This will temper the strength in the feeder cattle market but should result in stronger fed cattle prices. Crude oil prices are stabilizing and I feel we can count on higher energy prices longer term.
The Canadian dollar has potential to strengthen against the U. S. greenback. Equity markets are stabilizing and the U. S. government is buying long term debt. Long term mortgage rates are based on the returns of these debt instruments. This is a very positive step for the U. S. economy and housing sector. Secondly, two of America’s largest banks posted positive results for January and February. The balance sheets have taken the write downs on real estate. While unemployment may grow until the end of 2009, I think by this time next year we will say the worst is behind us. Consumer confidence will also increase during this time enhancing beef demand. Despite the stronger Canadian dollar, I’m still expecting very strong exports of feeder cattle, slaughter cattle and beef products to the U. S. over the next couple years. Canada has experienced larger exports of feeder cattle in 2007 and 2008 due to the lower calf crops and declining U. S. beef production.
I feel feeder cattle futures can move back up to historical highs longer term. Larger market ready supplies of fed cattle combined with a sluggish economy will temper the price upside during spring. However, prices are also expected to strengthen longer term into the first quarter of 2010. Looking at historical price patterns, the cattle market tends to be more favorable as the U. S. comes out of recession. The U. S. economy will turn around quicker than the industry can expand beef production.
Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For questions or comments, he can be reached at [email protected]or 204 287 8268.
The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.