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Prices stabilize as margins narrow

Fed cattle prices in Canada and the U.S. appear to have stabilized. Packers have been cutting back on weekly slaughter due to negative margins. Wholesale beef prices are struggling to move higher in line with the recent gains in fed cattle, but consumer demand is backing away at the higher levels. While ground beef prices continue to make new highs, middle and higher quality cuts of meat are actually selling at similar prices as last year this time.

Western Canadian feeder cattle values continue to percolate higher, but feedlot margins are hovering near breakeven and many buyers are starting to think twice before paying historical high prices. The U.S. feeder market continues to lead the Canadian market higher. In past years, January price levels for feeder cattle tended to set the barometer for the rest of the year and the market may be starting to stall out. The USDA January inventory report confirmed the lower calf crop and it doesn’t look like U.S. feeder supplies will increase until 2014.

U.S. cattle on feed numbers have been running three to four per cent above last year, but keep in mind feedlots have been placing lighter cattle compared to normal. Placements of feeders 600 pounds and lower have exceeded year-ago levels throughout the fall due to the drought in the U.S. Southern Plains. Therefore, U.S. beef production will be down each quarter throughout 2012 with a sharp drop expected October through December. The cow slaughter has not significantly tapered off, resulting in lower average dressed weights but this is expected to change in the latter half of the year.

Thin retail margins

Fed cattle in Texas traded in the range of $123 to $124 in early February, while Nebraska cattle sold at $187 to $198 on a dressed basis. Market-ready supplies remain rather snug, but packers cannot pass on these higher prices to restaurant chains and grocery stores. In November 2011, choice beef reached a high of $196 but traded as low as $183 in mid-February. In March 2011, choice beef was trading near $186/cwt. Fed cattle are about 20 per cent higher than last year, but beef wholesale prices are actually lower. U.S. consumer disposable income is only about three per cent higher than year-ago levels, which confirms the cash strapped grocery buyer is feeling the effects of higher food prices.

Unless we see higher wholesale values later in spring, it will be difficult for cattle prices to increase. Market ready supplies will increase in April and this could pressure the fed market. Restaurant spending tends to surge in March, which will enhance beef demand from a seasonal perspective, but it may not be enough to lift wholesale beef prices above year-ago levels.

The Canadian slaughter pace has also eased due to the stronger Canadian dollar and weaker American wholesale beef market. Canadian basis levels have been under pressure and western Canadian market ready supplies are actually similar to year ago levels. Alberta packers have been buying cattle in the range of $113 to $115, which is similar to prices in earlier in January. The Canadian fed market didn’t gain as much as U.S. prices earlier in winter, which has also tempered strength in the feeder complex.

Feeders stabilize

Western Canadian feeder cattle prices have remained relatively flat in February after experiencing a sharp jump in November and December 2011. Angus-cross, light flesh steers averaging 880 pounds sold for $141 in central Alberta. Demand for lighter weight cattle remains firm as 528-pound steers touched $199/cwt in east-central Alberta. The steer/heifer spread remains relatively wide with heifers trading at a $15 to $20 discount to steers. The USDA reported fancy six-weight steers averaging 613 pounds sold for $186 in Wyoming in mid-February. U.S. prices continue to trade premium to Western Canada but feeder cattle exports have not improved.

All cattle and calves in the U.S. as of January 1, 2012 totaled 90.8 million head, down two per cent from 92.7 million head on January 1, 2011. This is the lowest January 1 inventory since 1952. About 39.1 million cows and heifers have calved, down two per cent from 40.0 million January 1, 2011. There is clearly a smaller breeding herd heading into 2012.

I see a marginal decrease in total cattle inventory for January 1, 2013 as the U.S. inventory moves through a transition from contraction to expansion. The 2011 U.S. calf crop was estimated at 35.3 million head, down one per cent from 35.7 million head in 2010. This is the smallest calf crop since 34.9 million head in 1950. U.S. beef production will also be down in 2013 given the lower feeder cattle numbers. †

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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