September and October were periods of seasonal low demand. The U.S. government shutdown along with lower consumer spending resulted in softer restaurant traffic and tempered retail demand.
However there are a number of factors that should continue to cause higher prices for fed and feeder cattle. The holiday season causes consumers to spend more on food, which supports beef prices. At the same time, the overall economic situation looks positive in regards to employment figures and disposable income.
A year-over-year decline in fourth-quarter beef production should cause wholesale beef prices to ratchet higher. The deferred live cattle futures appear to be incorporating a risk premium due to the uncertainty in production. Stronger packing margins will spill over into higher fed-cattle values and result in positive feeding margins. Abundant feed grain has lowered the risk for cattle feeding and feeder cattle price will continue to adjust to the change in the feed grain complex. Therefore, overall, the market for fed and feeder cattle remains price positive but producer need to be on guard how the markets are reacting to the changing variables.
KEEP OR SELL?
This will be the year when cow-calf producers need to pencil out if they should sell their calves or place them in a custom feedlot. The feedlot sector needs to experience a period of positive margins after the past year and this will limit the upside potential in the feeder market.
U.S. third-quarter beef production was actually above last year, which kept wholesale beef prices under pressure. However, fourth-quarter beef production is expected to show a year-over-year decline of nearly 300 million pounds. This will be the first time this year the industry experiences a significant drop in beef production. In mid-October, fed cattle prices in the U.S. Southern Plains traded near record highs of $129/cwt to $131/cwt while at the same time Alberta prices were hovering at $121/cwt.
For the first quarter of 2014, U.S. beef production is also expected to be down by 300 million pounds in comparison to the same period in 2013. Exports will be down marginally but most of the decline in consumption will come from the domestic market. Retail prices will move higher given the lower supply situation and the market will ration demand. Retail beef movement and restaurant consumption will depend on the consumers’ willingness to pay higher prices.
Looking at past years, consumers will spend more on food in November and December. Therefore, I’m expecting wholesale beef prices to ratchet higher so choice product reaches the previous high of $205/cwt. Fed cattle values are expected to move an additional $3 to $5/cwt from current levels given the projection on the wholesale market. The accompanying graph shows in the past, these higher wholesale prices were relatively short lived. Moving into January and February, North American consumers want to lose the 15 pounds they added to their frames in November and December which generally results in lower beef demand. The fed cattle market has potential to be quite volatile in the first quarter of 2014 for this reason.
HIGH END OF MARKET
The U.S. fed-cattle market is near record highs and the Canadian market is also on the high end of the long term price range. In the past, the higher prices tend to stem demand sharply because consumer income does not increase at the same pace. Alberta break-even prices on current feeder cattle in the feedlot are about $120/cwt. Therefore, the feedlot sector should experience positive margins over the next two to four months.
Feeder cattle prices have been slowly climbing throughout the fall period as the feed grain prices trended lower. Barley prices are now consolidating after harvest and will likely remain relatively stagnant until spring. Therefore, feeder cattle values will be highly correlated with the fed market over the winter period. Replacement cattle are expected to continue climbing into December. It is important to note the June live cattle futures are trading at a $6 discount to the April contract. In January and February, feeder cattle prices have potential to come under pressure because feedlots will anticipate lower fed prices from May through August. Cow-calf producers should not count on higher values after December.
Despite the year-over-year decline in beef production and historically low supplies of feeder cattle, be realistic with price potential. A commodity is only worth what someone is willing to pay for it. If the wholesale beef market cannot sustain stronger prices, don’t expect the cattle market to stay near historical highs for long. †