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Low oil prices will definitely impact beef market

Fed cattle prices reached record highs in mid-December with Alberta packers purchasing steers in the range of $179 to $182, up nearly $10 from a month earlier.

Market-ready supplies of fed cattle remain relatively tight while consumer demand has increased during the holiday season. Retailers have been selling beef in smaller packages in an effort to enhance movement while restaurants have been slowly increasing menu items every few months in an effort to sustain margins.

Looking forward, there are a number of risks that could cause the fed and feeder cattle markets to come under pressure. Crude oil prices continue to trend lower resulting in slower economic growth in Canada and the U.S. This may be somewhat offset by a weaker Canadian dollar but consumers are sure to cut back on beef consumption if unemployment numbers start to grow and consumer confidence starts to wane.

Feeder cattle prices have been percolating higher given the healthy margin structure in the feedlot sector. Barley prices have potential to move higher in late winter, which could temper the upside in feeder cattle prices. However, the main factor driving feeder cattle prices higher is the strength in the fed cattle market. If fed cattle soften, feeders are expected to follow.

Production uncertainty

In the short term, the fed cattle market has incorporated a risk premium due to the uncertainty in production. U.S. cattle-on-feed inventories as of Nov. 1 were 10.6 million head, basically the same as last year. However, the slaughter pace is coming in lower than anticipated resulting in a sharper year-over-year decline in fourth-quarter beef production.

Tighter market-ready supplies was a major factor driving the market higher in December. Projections for beef production in the first and second quarter of 2015 have been revised upward from previous estimates. While the first quarter shows a marginal decrease in comparison to last year, second quarter beef production has potential to exceed year-ago levels given the current cattle on feed estimates. Notice third- and fourth-quarter beef production for 2015 is very similar to 2014.

Pork production estimates have been revised upward for each quarter and U.S. production for 2015 will exceed 2014 by nearly 900 million pounds. This is a major fundamental shift in the red meat complex compared to 2014 when both pork and beef production were below year-ago levels.

Canadian beef production during 2014 has been running two per cent above last year. Given the surplus of cattle and beef in Canada, beef production for 2015 will be very similar to 2014 providing no major influence on the market in the U.S. and Canada.

Oil price impacts beef

The demand equation has cause for concern moving forward. Falling oil prices will result in lower crude oil exports and lower demand for the Canadian dollar. This may be a mildly supportive factor for cattle prices. However, falling oil prices generally results in a weaker stock market given the larger influence on the overall economy from the energy industry. This could cause larger unemployment over the next six months as expansion projects are scaled back and the ripple effect through the economy tempers growth in other industries.

Housing, banking and service industries across country could feel the impact, which will slow overall consumer spending and beef consumption. Government revenues will also decrease resulting in lower expenditures and support programs. Lower gas prices will decrease transportation costs but if one is unemployed, this has little comfort to sustain the household budget.

I’m very concerned how the U.S. and Canadian economies will behave over the next six to 12 months. Strong crude oil prices reflecting a strong economy is often the backbone for future economic growth. If the energy sector drags down the overall stock market, as we’ve seen in Canada, all companies will scale back expansion plans and look to cut costs. January and February are usually periods of slower consumer spending on food both at home and away from home. This seasonal effect could be exasperated with lower energy prices.

The feeder cattle market will continue to move in tandem with the fed market and will be very sensitive to the health of feeding margins. Breakeven fed cattle prices for March and April are near $175 and any slippage under this level will result in a softer tone for feeder cattle prices.

I’m somewhat bullish for southern Alberta barley prices during March and April given the tight stocks of barley. Rising barley values could also weigh on the feeder market, especially if feedlot margins move into red ink.

Feedlot operators and cow calf producers are encouraged to have a prudent risk management strategy in place over the next six months. Markets generally do not like demand uncertainty and both pork and beef production will be above year-ago levels in the second quarter. The risks point to a neutral to slightly softer cattle market starting in the second quarter of 2015.

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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