U. S. Cattle on feed numbers have been coming in under year ago levels, but the tighter supply situation has done little to support the cattle market. Instead, the main driver has been the overall economic crisis causing a major shift in the demand equation. The problems have spread to other major beef markets such as Japan, slowing overall beef consumption. Stock indexes, which reflect the health of the overall economy, have been leading the cattle market lower.
Until we see some type of recovery in the average consumer income, there is little upside potential in the live cattle market. Unemployment numbers continue to trend higher; consumer confidence is at record lows; there appears to be more negative news coming down the pipeline as the auto industry fails to secure a “bridge loan.” U. S. consumers are looking at lower priced pork and poultry during the recession. Index fund liquidation has also weighed on the live cattle prices as the futures market makes new contract lows. Feeder cattle values are showing little enthusiasm despite softer feedgrain values.
Cattle on feed in Alberta and Saskatchewan as of Nov. 1 were reported at 943,789 head, up two per cent from Nov. 1, 2007. Placements were up 26 per cent in comparison to last October and marketings were down seven per cent. Fed steers were trading in the range of $92/cwt to $94/cwt in late November, down marginally from earlier in the month.
U. S. cattle on feed numbers as of Nov. 1 were 11.0 million head, down seven per cent in comparison to the same time last year. Placements during October were 2.44 million head, down 11 per cent from October of 2007. October live cattle marketings were three per cent below year ago levels. The overall report was considered fundamentally friendly for the cattle market. Placements were below expectations which should be supportive for the deferred months and the healthy marketings number reflects feedlots are current with production. This is a major concern because in bearish markets, feedlot managers tend to hold back on cattle but the costs are still too high to keep animals an extra week. Feeding margins remain deep in the red.
U. S. beef exports for 2008 are still on track to reach 1.84 billion pounds, but we may see some decreases in upcoming months. Demand from Japan and other key markets have slowed with the recession. We have seen a decrease in offshore pork movement during the fourth quarter; Therefore, the domestic market has to absorb additional pork supplies and this is weighing on the beef complex.
Retailers have experienced a slowdown in movement of higher end cuts of meat. Beef consumption has eased considerably in regions that have experienced significant unemployment. Also, demand from higher end resorts and casinos remains sluggish.
The index funds are still long nearly 107,000 contracts in the live cattle futures. There has been marginal liquidation in the past couple weeks, but nothing significant. Regular speculative funds are net short 10,000 contracts and have potential to add to their position. Commercial traders are net short 66,000 contracts. Long liquidation from index funds and further selling from the speculative sector is a major downside risk in upcoming months.
Live cattle prices are expected to stabilize early in 2009. Tighter beef supplies will be supportive but the main factor is the lack of demand. At this time, the financial crisis may have to absorb additional negative news before the economic recovery can begin.
Feeder cattle prices are expected to stabilize in the New Year as feedgrains trend lower.
The ethanol sector is struggling and a major producer VeraSun filed bankruptcy Oct. 31 and has stopped receiving corn at certain plants. If ethanol demand in the U. S. is cut by 30 per cent, the U. S. corn carryout would exceed two billion bushels causing corn futures to drop to under $2.50 per bushel. Barley would follow corn in this trend. Cattle producers need to be aware that this is a major risk in the corn and overall feedgrain complex. Lower energy prices are also causing a major deflationary period amongst all food products. Beef prices have increased in the range of four to seven per cent from year ago levels due to inflation but this price influence will erode in upcoming months.
Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. He can be reached at [email protected]or 204 287 8268.