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Sluggish Beef Demand, Lower Prices

Fed Steers in Southern Alberta were trading in the range of $81 to $83 in late September as strength in the Canadian dollar continues to weigh on domestic prices. At the same time, prices in the U. S. Southern Plains were in the range of $84 to $84.50. I’ve had many inquiries in regards to beef demand. Over the past year, producers have been basing their decisions on lower on cattle feed numbers but this is only half of the equation. Given the current economics, it will take some time for the consumptive environment to improve. In this issue, I will discuss the general environment.

Beef demand is very highly correlated with the health of the overall economy. Statistics Canada reported leading indicators up 1.1 per cent in August, the biggest jump since 2002. This follows a 0.6 per cent increase in July. These leading indicators provide direction for the economy over the next six months. The housing index was up 3.1 per cent during August after noted gains in June and July. Canadian unemployment rose to 8.7 per cent in August and analysts feel that this will top out at nine per cent later in 2009. Canadian consumer confidence remains on a six month upward trend as the conference board’s survey came in at 88.4. The TSX equity index has reached new 12 month highs, which is making workers feel more comfortable and helping the confidence level. A one per cent increase in consumer spending equals a one per cent increase in beef demand. The Canadian situation is relatively stable. Supplies of other meats don’t greatly influence Canadian beef consumption patterns due to supply management of poultry and steady pork prices.

Beef demand in the U. S. remains very sluggish. The White House stated that U. S. unemployment should not get worse than 10 per cent, compared to the current rate of 9.7 per cent. There were still 216,000 jobs lost in August. Laid off workers who have settled for part time work or given up looking for new jobs, (the new term “under employment rate”) is now at 16.8 per cent. This is a concern in regards to growth in consumer spending. There are still 6.2 million Americans receiving jobless benefits. Approximately 13 per cent of American homeowners with a mortgage are behind on payments. Private analysts suggest there could be two million home foreclosures over the next 12 months. The housing sector is what started the recession and a recovery in housing is needed to sustain economic improvement. U. S. consumer confidence was at 54.1 during August, up from 47.4 in July. We need to see a number over 75 to safely say beef demand is improving. U. S. consumers do not expect an increase in their incomes over the next 12 months which will limit retail food purchases and restaurant demand. The decrease in U. S. restaurant traffic this summer was the steepest since 1981 after 13 months of straight declines. The problem is that people cut back on spending and a new frugality sticks with the average person or family for about 12 to 18 months. Therefore, it takes time after a recession for consumers to increase their spending patterns. Nutrition and safety also influence demand but at this time, consumer income levels appear to be the main factor.

FEEDER PRICES SOFTEN

Feeder cattle prices are slightly softer this week across Western Canada. The market is coming under pressure due to the stronger Canadian dollar and slower feeder cattle exports. Canadian feedlots have also lowered their buying ideas because of the poor margins over the summer and softer fed cattle prices. Steers in the 700 to 800 pound category are two per cent lower than year ago levels on average in Alberta and Saskatchewan. Slower demand from south of the border will cause larger numbers of Manitoba and Eastern Saskatchewan cattle to move into Alberta. We haven’t seen this on a large scale so far but just starting to see the effects on the market. I’m somewhat bearish feeder cattle in the short term.

The fed cattle market will stay soft into final quarter of 2008 but then start to improve next year. Corn prices will likely stay under soft for the remainder of 2008 so we expect prices for feeder cattle to start improving in December and continue to trend higher into March 2010. Stronger feeder cattle prices in the spring of 2010 should cause U. S. cow calf producers to hold back on heifers and start rebuilding the herds. This should cause feeder prices to trend higher in the fall of 2010. Fresh supplies from retained U. S. heifers will only start to come on the market in the fall of 2011 or early in 2012. Longer term, we are bullish to the feeder cattle market but softer prices are expected over the next 2 months. Look for lower North American beef production in 2010 and 2011 due to the lower calf crops and smaller feedlot placements.

Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For questions or comments, he can be reached at [email protected]or 204 287 8268.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.

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