Fed cattle prices have traded in a steady range over the past month with Alberta packers buying fed cattle from $164/cwt to $166/cwt.
While the cash trade has been relatively stable, the futures market has been extremely volatile due to the uncertainty in consumer spending behavior over the next four to six months.
Chinese growth has come in lower than earlier anticipated for the third quarter and deflationary factors are starting to influence the economy; Europe continues to be in a recession; Japan has experienced a sluggish economy as well along with a sales tax increase; North American equity markets have dropped sharply from the recent highs and other commodities such as crude oil remain under pressure. The spread of Ebola appears to be contained for the time being limiting effects on restaurant traffic but this was a fear earlier in October.
Despite all these factors, wholesale beef prices have held value and there is no major signal consumers are reigning in spending on beef products. In fact, restaurants appear to have benefited from falling gas prices as disposable income in North America slowly improves.
September is usually a slower period for food expenditures; however, U.S. at-home food spending was up a whopping 11.5 per cent over year-ago levels while away-from-home food spending jumped 7.5 per cent. October data is expected to show similar results. Packers are now gearing up for the holiday season during November and December, which is seasonally a positive period for beef consumption.
Fewer cattle, heavier weights
U.S. cattle on feed inventories are running about one per cent below year-ago levels. However, U.S. year-to-date beef production was 19.2 billion pounds, down 6.1 per cent from 2013. The number of head slaughtered was down 7.2 per cent. Lower corn prices have allowed feedlots to feed cattle to heavier weights, which are up nearly 18 pounds from last year. Steers are making up a larger percentage of the slaughter mix, which is also contributing to the larger weights. The cow slaughter has dropped sharply and industry is experiencing a rise in heifer retention for herd rebuilding.
Alberta and Saskatchewan, September 1 feedlot inventories were also down one per cent compared to Sept. 1, 2013. For the week ending October 11, the Canadian federally inspected slaughter was up six per cent over 2013 and beef production was up three per cent. Alberta carcass weights are running seven pounds over year ago levels offsetting the lower feedlot inventories. In addition to lower U.S. beef production, the stronger greenback is having a positive effect on the cattle market in Canada. Exports of Canadian fresh and chilled cuts are up 11 per cent over last year; exports of slaughter steers and heifers are up six per cent over year-ago levels.
The demand equation remains uncertain moving forward. Production of pork and poultry is coming in higher than earlier anticipated and beef remains relatively high priced compared to other meats. The main question is if consumer activity will decline in upcoming months?
November and December will likely show year-over-year spending increases but the contraction in restaurant and retail spending in January and February could be larger than normal.
I believe the U.S. economy has potential to plateau in regards to unemployment rates, consumer confidence and overall growth. After a robust period, if conditions don’t continue to improve, consumer spending has a tendency to ease. This behaviour pattern is especially important for beef consumption and fed cattle and wholesale beef prices. For example, retail grocery chains are not featuring beef as often in weekly flyers. Retail prices serve to ration demand through higher prices and so the beef complex can be extremely vulnerable.
The supply situation in Canada and the U.S. remains supportive. Cattle on feed inventories are expected to remain below year-ago levels for the final quarter of 2014 and first quarter of 2015. Feedlots have experienced positive margins and this should continue into the spring of 2015. Breakeven prices in Alberta are in the range of $155/cwt to $160/cwt for February through April. Fed cattle prices are expected to stay firm but are vulnerable for minor slippage in January and February.
Feeder cattle were trending higher in early fall, but have levelled off at historically high prices. Barley prices in Southern Alberta have jumped from the harvest lows of $160/mt delivered at Lethbridge to $180/mt. Barley fundamentals are relatively tight for 2014-15 so there is potential for further upside which will stem the strength in feeder cattle prices. Feeder cattle prices are expected to remain stable but are vulnerable if fed cattle values experience weakness early in 2015.