Western Canadian fed cattle prices have held value throughout the first quarter of 2016 with Alberta values ranging from $175 to $178 per cwt. Feeding margins remain in negative territory on current pen closeouts, which has caused market-ready supplies to back up in the country. Carcass weights are running sharply above last year as feedlot operators hold back for higher values.
Beef demand has been tempered due to slower restaurant traffic. Eastern Canada and the northeastern U.S. continue to struggle through ongoing winter storms at a time when beef consumption moves through a seasonal low. Economic uncertainty has also tempered consumer confidence, which has caused the average family to reign in food spending.
Feeder cattle markets have been quite volatile, reeling from the effects of negative margins over the past three months. The U.S. cow-calf producer has been aggressively expanding the herd over the past year and the market will absorb the increase in feeder cattle numbers this spring.
Cattle on feed in the U.S. as of Jan. 1 were 10.6 million head, which was actually slightly below year-ago levels by 50,000 head. Placements during December were 1.5 million head, down one per cent from December of 2014 while fed cattle marketings were up one per cent.
It’s important to realize that the number of feeder cattle outside feedlots as of Oct. 1, 2015 was actually up one million head compared 2014. These cattle will likely move off small grain pasture later in March and early April.
The USDA lowered its first-quarter production estimate, as cattle inventories are not as large as earlier anticipated. However, they are still reflecting a year-over-year increase of 200 million pounds due to heavier carcass weights. Again, I want to draw attention to third-quarter production, which is expected to be 300 million pounds above last year, which will pressure fed cattle prices from July through September.
Alberta and Saskatchewan feedlot inventories totaled 938,000 head as of Jan. 1, up four per cent from Jan. 1 of 2015. Canadian beef production during January was 13 per cent above last year largely due to the heavier carcasses. Feedlot placements in December were up 14 per cent over December of 2014 due to slower feeder cattle exports to the U.S.
I’m forecasting lower beef demand for 2016 due to constraints on consumer income levels and on food spending. The average consumer’s “at home food spending” was basically the same in 2015 as in 2014. However, “away from home food spending” during 2015 was up a whopping 7.2 per cent. This large year-over-year increase is not sustainable longer term with disposable income only rising 2.5 per cent. Recent data has U.S. ground beef prices are up 17 per cent over the past two years while steaks are up 18 to 22 per cent. Beef prices have risen quite drastically compared to the average American’s income.
Secondly, increasing supplies of alternate meats, mainly lower-priced pork, will also temper beef demand.
The Canadian dollar is highly correlated with crude oil prices. U.S. crude oil stocks have been building throughout the winter but there is a seasonal tendency for stocks to slowly decline reaching a low in late summer. Don’t be overly bearish on the Canadian dollar below US$0.70/Cdn. The tendency moving into the summer is for stability to light strength in third quarter.
The break even fed cattle price for current pen closeouts (yearlings that were placed late last summer) is near $200 but recent Alberta prices are only at $178. Unhedged cattle are in red ink by nearly $250 to $300 per head. However, with 800-pound steers in Alberta selling for $205, the break even for early summer is about $167.
There’s potential to see profitability for the early summer months, which is supportive for nearby feeder cattle markets. If producers are not hedging or forward contracting their feeders, I think they should be aware that in the third quarter, the cattle market could experience a major setback. Rising beef production, seasonal low beef demand and a marginally stronger Canadian dollar will be the factors to watch. I believe this will temper additional strength in the feeder market over the next month.
Alberta fed cattle prices are expected to peak in late March and early April and then start a descent to the summer lows in August and September. Feeder cattle prices are expected follow a similar trend. Feeding margins are expected to hover around break even throughout 2016.