Fed and feeder cattle prices in Western Canada have traded in a sideways range over the past month. Negative feeding margins and the high cost of feed grains has limited the upside on feeder cattle while stagnant wholesale beef prices and lower-than-expected consumer demand has tempered any strength in the fed market. The prolonged winter has also contributed to the softer price structure.
Feedlots have contended with adverse pen conditions and the potential for increased death loss when bringing in replacement cattle. At the same time, consumers have been in hibernation mode resulting in lower restaurant traffic. The whole economy has struggled to gain momentum through the winter. Looking forward, there is a fair amount of uncertainty. Feeder cattle will be very sensitive to crop conditions and feed grain availability. Fed cattle markets will be held hostage by the price conscious consumer.
U.S. cattle-on-feed numbers have been trending six to seven per cent below year-ago levels in the first quarter of 2013. Lower placements from last fall have resulted in the year-over-year decline in feedlot inventories and contributed to a similar drop in beef production. The U.S. year-to-date slaughter is down 2.7 per cent from 2012 while overall beef production is 1.9 per cent below year-ago levels. The year-over-year drop in beef supplies has been lower than anticipated.
In Canada, the federal inspected slaughter is running nine per cent below last year while beef production is down eight per cent in comparison to 2012. Feedlot inventories have also been down by a similar amount so the lower slaughter and production is not a surprise. Canadian packers are having a difficult time moving beef products and margins have not been overall encouraging.
One note of interest is that the year-to-date steer slaughter in Western Canada is up about four per cent while the heifer slaughter is down 22 per cent from 2012. Canadian export of live slaughter steers and heifers for the first quarter of 2013 was 108,000 head, up one per cent from 2012. I’m looking for these trends in the Canadian system to continue for the remainder of the year with a sharper drop in beef production in the final quarter.
Consumers aren’t buying
While analysts have a clear picture of the supply situation, the demand equation is not so certain. In 2011, at-home food spending by the average American consumer jumped by six per cent over 2010. This is a fairly aggressive year-over-year positive increase. However, this rate of increase has not continued. In 2012, the year-over-year increase in at-home food spending was up only 3.0 per cent. January 2013 at-home food spending was up 3.3 per cent, but in February, expenditures were actually down 0.1 per cent and March data will likely show a similar figure.
The beef market has now risen to levels where consumer demand is not increasing. There is a similar trend in away-from-home food expenditures. During 2012, away-from-home food spending was up 10.8 per cent over 2011. So far in 2013, away-from-home food spending is only up 5.5 per cent. This is extremely important for the higher-end cuts of beef.
The beef and fed cattle markets are not going to maintain the long-term upward trend if at-home food spending does not continue to experience a year-over-year increase. Ground beef prices at the retail level are up 15 per cent over last year while Choice boneless sirloins are up 11 per cent. The price increase in retail beef products has outpaced the increase in consumer spending. At historical high prices, markets ration demand to slow consumption and that is what we are seeing in the fed cattle and beef market.
Alberta packers have been buying fed cattle in the range of $113/cwt to $115/cwt in April. There is potential for seasonal weakness into the summer and fed prices could dip down to the $108/cwt area. After July, the fed market is expected to slowly percolate higher into the final quarter reaching $115/cwt to $120/cwt by year end.
The feeder cattle market is expected to experience a similar pattern over the next eight months. Replacement values are expected to remain flat into the summer and then increase in the fall period as the grain harvest progresses. Feeder cattle prices will be sensitive to crop development as experienced last year during the Midwest drought. At this time, new-crop feed grains are expected to be rather burdensome so abundant feed availability will be the main factor driving the feeder market in the fall period. †