Tough times for U.S. beef producers might bode well for Canadian cow/calf operations and feed grain growers
The U.S. Midwest is undergoing one of the worst droughts on record, which is significantly changing the cattle market complex. Over the past two years, the cattle market has been encouraging expansion through record-high prices for feeder and fed cattle. However, we now find many producers liquidating high-quality cows and heifers due to high corn prices and poor pasture conditions. Extensive herd rebuilding will be delayed by one year and possibly two.
In addition to the U.S. drought, the cattle complex continues to struggle with weak consumer spending and the extensive heat wave has also tempered beef demand. Fed cattle prices have been grinding lower throughout the summer due to softer demand and larger-than-expected beef production. U.S. feedlot operators are struggling with high input costs and although feeder prices have deteriorated, values are still significantly higher than last year, especially for lightweight calves.
Fed cattle were trading at $117/cwt in the U.S. Southern Plains in mid-July while Alberta packers were buying slaughter cattle in the range of $108/cwt to $111/cwt. U.S. cattle-on-feed numbers have been running two per cent above last year while Alberta and Saskatchewan feedlots are carrying similar numbers as in 2011. Carcass weights in Canada and the U.S. are sharply higher than year-ago levels, therefore beef production is coming in higher than earlier projections for the third quarter which will continue to weigh on the fed market. Beef production in the fourth quarter was expected to be down sharply from last year but with the larger placements in July and August, production will likely be very similar to 2011.
Beef demand remains a large uncertainty moving forward. First, offshore beef exports will be down from earlier projections given the recent sales pace. It now looks like U.S. beef exports will not be as large as last year, which is partly due to the stronger U.S. greenback.
Good for Western Canada
The U.S. economic situation appears to have stagnated in the second quarter and latter half of 2012 will experience modest growth. During the first quarter of 2012, the U.S. added 226,000 jobs per month but only 75,000 jobs per month in the second quarter. Unemployment remains at 8.2 per cent, which is not a healthy signal. Consumer confidence has also deteriorated in summer and the does not look to improve in the fall. Disposable income is marginally higher than last year and has not outpaced inflation. Therefore, consumers have weaker spending power than they did a year ago which effects restaurant spending and higher end retail beef demand.
Fed cattle prices in southern Alberta are expected to trade in the range of $105 to $113 in the third quarter and slowly percolate higher in the fourth quarter to $110 to $116. Longer term, the strongest prices are expected in January through March when slaughter steers could peak at $120. April 2013 live cattle futures remain near historical highs; we have all seen how fast the market can change with a short period. The deferred futures are still factoring a lower beef production in the first quarter of 2013 but this will increase and weigh on the market due to larger placements in the summer months.
Western Canadian feeder cattle prices have held up fairly well compared to the U.S. market. In southern Alberta in mid-July, 600- to 700-pound steers sold in the range of $160/wt to $170/cwt while 700- to 800-pound cattle steers sold from $143/cwt to $155/cwt. Heifers were selling at a $10/cwt to $12/cwt discount to steers. The USDA reported black medium-flesh steers weighing 665 pounds sold for $151 in Missouri; heifers weighing 700 pounds sold for $138. Alberta and Saskatchewan feedlots are paying a sharp premium over U.S. feedlots, which is a price anomaly and usually short term. The price discrepancy is due to record-high corn prices.
Barley prices strong
Cash barley values in southern Alberta reached record highs of $285/mt in mid-July due to the historically tight carryout for the 2011-12 crop year. For 2012-13, we may see some pressure on the barley market during harvest, but cash prices will stay firm into the winter. Barley prices will likely be 15 per cent higher than last year which will weigh on the feeder market. Fed cattle prices will be similar to last year so the feeder market has to give way to the rising input costs. It is important to realize that world barley supplies are also below the five-year average and Canada will have a larger export program.
Adverse growing conditions in the Black Sea region has caused world barley values to surge. The price structure may cause barley in Northern Alberta, central and northern Saskatchewan to move off the West Coast instead of to Alberta feedlots. Producers need to watch this closely because the world feed grain complex is extremely snug. During the spring of 2013, domestic barley prices in Alberta need to trade at a $20 to $30 premium to world values to cut off the export program. This is a major risk to the feeder market moving forward. †