The USDA has released its January cattle inventory report with a few surprises about cattle numbers. It appears that U.S. cattle producers are expanding their herds more aggressively than expected and this will have a large bearing on Canadian fed and feeder cattle prices throughout 2016.
Feeder cattle exports to the U.S. have fluctuated sharply over the past couple of years as prices reached historical highs. More recently, exports of replacement cattle have dropped off sharply as prices erode. At the same time, fed cattle exports to the U.S. have experienced a year-over-year decline while exports of fresh and chilled cuts have marginally increased. The U.S. cattle inventory report at the beginning of the year provides Canadian cattle producers with a firm idea of fundamental structure south of the border. It’s also important to know how the U.S. cattle producer has responded to the recent historical high prices in 2015.
Total inventory of cattle and calves as of Jan. 1, 2016 was 91.988 million head, up three per cent over January 1 of 2015. There was a year-over-year increase of 2.845 million head, which is quite substantial. It is important to note that the number of cows and heifers that have calved as of Jan. 1 was reported at 39.646 million head, which is up three per cent over year-ago levels or one million head. Heifers for beef cow replacement were 6.285 million head also up three per cent or 200,000 above last year.
The U.S. cow-calf producer was aggressively expanding in 2015 and during this phase, the market for feeder cattle has unique characteristics. Unlike a normal market, higher prices cause fewer animals to be supplied because more heifers are held back for breeding. Economists define this as an “inverted supply curve.” This results in extreme volatility through the expansionary phase and often causes feeding margins to move into negative territory, as we have seen in the final quarter of 2015 into January 2016. Feeder cattle supplies are tighter than expected and this market environment continues until the calves from these held back heifers come on the market.
The 2015 calf crop was estimated at 34.3 million head, up 0.8 million head from 2014. Producers may remember that in the November cattle-on-feed report placements were historically low; however, the USDA estimated feeder cattle outside feedlots as of Oct. 1 at 29.5 million head, up nearly one million head in comparison to October 1 of 2014.
Therefore, we’ve seen lower placement numbers in November and December but the excess feeder cattle will likely move off small grain pasture and come on the market once the winter wheat comes out of dormancy.
Feedlot placements of feeder cattle are expected above year-ago levels in late February through early April which will weigh on feeder cattle prices. Secondly, longer term, this could pressure fed cattle prices in August and September.
Expansion for another year
Given the current cow numbers, heifers for beef cow replacement and the estimated cow slaughter, I’m expecting the 2016 calf crop to also be up by 800,000 head reaching 35.1 million head. We’ll see expansionary activity for at least another year.
Feeder cattle exports to the U.S. have been quite variable over the past two years. In 2014, exports of feeder cattle and calves to the U.S. totalled 441,695 head, which was up 40 per cent from 2013. However, during 2015, exports fell back to 287,803 head or what I consider more normal levels (down 35 per cent from 2014). The large surge in feeder cattle exports of 2014 may have been due to the “inverted supply curve” of feeder cattle south of the border.
Given the larger volume of U.S. feeder cattle that will come on stream in March and April, I believe we will see another year-over-year decline in feeder cattle exports from Canada to the U.S. Feeding margins have also been struggling in severe red ink so this will also contribute to the lower export pace.
U.S. beef production is expected at 26.6 million pounds in 2016, up 900 million pounds from 2015. If my estimates for the 2016 calf crop come to fruition, U.S. production for 2017 could also be up by another 900 million pounds.
The U.S. cattle herd aggressively expanded during 2015 and this will continue through 2016. Beef production will increase sharply over the next two years. I’m expecting year-over-year decreases in Canadian feeder and fed cattle exports to the U.S.