I’ve received a number of inquiries as to the cattle outlook for 2009. While it is difficult to actually project the current price structure for 2009, producers can have a knowledgeable idea of the factors driving the market throughout the year. This starts with a healthy understanding of fundamental structure and then monitoring data and economic conditions on a regular basis. Below is an executive summary of the cattle outlook.
The Canadian and U. S. cattle herds are in a contraction phase. Negative returns in the feedlot sector along with lower calf prices have resulted in liquidation of older cows and limited heifer retention. Deteriorating commodity prices resulted in lower feed costs but margins were in the red for most of 2008.
The U. S. was expected to move into an expansion phase from 2007 through 2009 but recent data suggest the high grain prices and sluggish calf prices have set a negative tone in the cow calf sector. The industry is bracing for a smaller calf crop in 2009. U. S. Feeder cattle prices have dropped from historical highs to five year lows and we have seen similar market action in Canada.
U. S. and Canadian 2009 beef production is expected to be very similar in comparison to 2008. Therefore, the price structure will mostly focus on the demand equation. The cattle market will have a difficult time divorcing itself from the financial markets and other outside influences on the North American economy. Lower consumer incomes played havoc on the cattle market in 2008 and will continue in 2009. The cattle market has always faired very poorly in past recessions; therefore, it is difficult to expect a significant recovery for 2009.
Per capita beef consumption in Canada reached a high in 2003 and has been on a steady downtrend since. For 2008, per capita consumption is expected to be 31.5 kg per person and this may drop to 31.0 kg per person in 2009.(based on carcass weight) In the U. S., the average person is expected to consume 62.4 pounds in 2009, down slightly from 63 pounds in 2008. (Based on retail weight)
Lower domestic Canadian consumption will result in slightly larger beef exports. Live cattle exports will actually expected to be down from 2008 largely due to the shrinking Canadian inventory.
The 2009 U. S. beef export program will be down nearly 140 million pounds in 2009. The stronger U. S. dollar appears to be slowing demand for the first quarter of 2009. The weaker Canadian dollar will be supportive for Canadian export prices. At the same time, Canadian imports of U. S. beef are expected to be down marginally in 2009 due to the stronger greenback.
The USDA recently lowered their production estimates for pork and we are experiencing a similar hog situation in Canada. The hog complex is in the beginning of a contraction phase and this will continue in 2009. Less competition from other meat products will be a supportive factor for lower value beef cuts.
Looking at the outside market influences, crude oil has been on a strong downward trend since July. When a market has a direct trend of this magnitude, there is bound to be a short covering rally at some point. However, it is difficult to say how low crude will go first. This rally could take crude oil up to $70 per barrel area quite easily and a bounce of this magnitude would spill over into the cattle. This will be an opportunity for some cattle hedges when this crude oil short covering rally does occur. The U. S. stock market indexes are showing signs of stability but nothing to say a bull market is right around the corner. RRSP season in January and February will be a very good indication for the stock market potential in 2009. If the market doesn’t bounce during this timeframe, don’t expect too much price appreciation in the latter part of the year. Lower interest rates and government stimulus packages will have a limited effect in the short term but will be constructive longer term for the cattle situation.
I’m expecting a very regular seasonal pattern to the live cattle market in 2009. Prices may struggle in January but we should see a price rally in February and March. This will be an opportunity to hedge second quarter live cattle sales. This rally in the cattle could be further amplified by spill over influence of a short covering rally in the crude oil. For 2009, the market will always be vulnerable to weakness in the demand which will result in continued volatility and limit the upside price potential.
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.
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