Fed and feeder cattle prices have been ratcheting higher in May as wholesale choice beef prices reached all-time highs. It appears after a long winter, consumer demand is stepping forward more aggressively on the retail and restaurant level.
Alberta fed cattle prices made yearly highs in May reaching up to $121/cwt, which is the first time feedlot margins have been in positive territory since last summer. Renewed optimism in the feeding sector has resulted in solid demand for replacement cattle. Pasture conditions are excellent across Western Canada and the market for featherlight calves is also starting to percolate higher. The key factor moving forward will be consumer expenditures and the economy in general. While retail beef prices continue to trend higher, the increase in beef tenderloins earlier in spring was inflation-related due to higher costs for labour and transportation. However, we now find wholesale beef prices also moving higher, which is a positive signal for the overall beef complex.
U.S. feedlot inventories have been running five per cent below year-ago levels but first-quarter beef production was only marginally lower than last year. Feedlot placements during March were up six per cent over March of 2012 as cattle moved off small grain pasture. However, the industry is projecting a sharper year-over-year drop in feedlot placements in the latter half of 2013, which will translate into lower overall beef production.
The USDA also released its forecast for 2014 on its May WASDE report. The 2014 beef production is projected to be down over one billion pounds in comparison to 2013 and down nearly 1.8 billion pounds relative to 2012. This has serious implications for the consumer as the market will function to ration demand through higher prices. The market will have to move high enough to slow consumer consumption — therefore, average income levels need to be watched closely moving forward.
From January 1 through May 4, Canadian cattle slaughter was 885,000 head, down nine per cent from 2012. Total beef output was 333,000 tonnes for the same time frame, which reflects an eight per cent year-over-year decline. Lower beef production has resulted in lower beef product exports, with a whopping 24 per cent drop to the U.S. as a larger percentage of production is being consumed in the Canadian market.
Looking at the demand structure, choice wholesale beef prices reached an all-time high just over $205/cwt in early May. The market always struggled to move above the magical $200 level, but we now find some breathing room to the upside. Consumer confidence climbed to 68.1 in April, up from 61.9 in March and only 58.4 in January. Strength in the housing market is a positive signal because small business financing comes from home equity and credit cards. Approximately 60 per cent of all jobs are from small business, so this is needed to bring down the U.S. unemployment rate longer term. Unemployment continues to trend lower, dropping to 7.5 per cent in April, while GDP is now solidly above 2.5 per cent, which is also needed to bring down unemployment and maintain growth. Positive economic data bodes well to sustain the higher beef market.
FEED GRAINS UNCERTAIN
Fed cattle prices may come under some pressure during the summer. Seasonally, beef production increases in June and July and consumer spending is expected to remain constant. Prices for Alberta slaughter cattle are expected to slowly percolate higher into the fourth quarter and readily trade in the range of $125/cwt to $130/cwt. I’m factoring in a bias for a weaker Canadian dollar, which will also enhance fed values.
Feeder cattle prices have stabilized now that feeding margins are hovering near break-even. However, feedgrain prices will remain historically high until the harvest season. Pressure on the fed market will limit the upside on replacement cattle until late July. In August, feedlot operators will start factoring in lower feedgrain costs and higher fed prices for the fall and winter period. This will cause yearlings to slowly trend higher and when the bulk of the calves come on stream in October and November, feeder cattle prices are expected to be $10/cwt to $15/cwt above current levels. It is important to note the market needs favourable crop development in order for this projection to materialize. The later-seeded U.S. corn crop will pollinate during seasonally hot temperatures and timely rains are needed throughout the growing season. I don’t expect major upside to develop in the feeder market until the Canadian barley and U.S. corn crops are more certain. †