Cattle supplies are tightening, but consumer demand for beef is still down

“the weakness in the live cattle prices from April through June will keep feeder cattle prices under pressure during this time”

Available supplies of market ready cattle are expected to tighten in the upcoming weeks. It appears that on-feed numbers are lower than earlier anticipated and the cash market is expected to percolate higher in the short term. Fed cattle in the US southern plains were trading in the range of $82 to $83 in late January. At the same time, Steers in southern Alberta were trading hands between $87 and $88.50. The weaker Canadian dollar has supported cattle prices north of the border but wholesale supplies are building. This is causing packers to cut back on the weekly slaughter pace despite the positive margins.

The USDA estimated cattle on feed as of January 1 at 11.234 million head, which is down seven percent from last year. Placements were 1.65 million during December, down three percent while marketings were 1.68 million or two percent higher than last year. This report was considered bullish to the market. Feedlots are current with production and the lower placement number is friendly for the deferred months. US feedlots are losing more than $200 per head; therefore, on feed numbers are at five year lows. This is the lowest number on feed since January 1 2003.

To reiterate from my previous report, the placement structure during the fall of 2008 will cause a further reduction in market-ready cattle into the March timeframe. Prior to and during September, the bulk of the placements were 800 pounds plus but since October, the bulk of the placements have been less then 700 pounds. Supplies of market-ready cattle could become abnormally tight during March.

Cattle-on-feed in Alberta and Saskatchewan were 1.035 million head as of January 1, 2009, which is up five percent from last year. Placements during December in Alberta and Saskatchewan were 121,043 head, down 18 percent from December of 2008. Marketings were 138,600, down two percent from last year. Breakeven values are nearly $6/cwt to $8/cwt above the current cash market and losses are building.

Higher unemployment numbers and lower consumer incomes continue to have a major effect on beef demand. Retail movement remains slow, especially for the higher end cuts. Second tier restaurants are going through a very difficult period after a couple major chains declared Chapter 11 last fall. Rough estimates suggest that this demand actually doubled in the past 15 years and now we are seeing a significant claw back in consumption. People are not eating out as often and when they do dine out, consumption patterns are very conservative. Equity markets continue to trade at the lower levels and we may see further downside. Major corporations are expected to go through another round of layoffs in the first and second quarter of 2009.

Packing margins have improved but the weekly slaughter pace has slowed. US year-to-date beef production is down just over 13 percent in comparison to the same period in 2008. The slaughter pace is down nearly 15 percent. Wholesale prices are lower with choice product quoted at $148.19/cwt down $3.24/cwt; Select prices are down a meager $0.38/cwt at $143.86/cwt for the week ending January 24.

I’m expecting the fed cattle market to edge higher into March and then trend lower into the summer months. Tighter supplies of market ready cattle will be supportive in the short term. However, the function of the market is to encourage demand. On feed numbers will build into summer given the higher placements of light weight cattle in the fourth quarter of 2008. There is potential for further weakness in the economy which will continue to spill over into the beef complex.

Feedgrain prices are expected to trend lower but this will do little to enhance demand for feeder cattle. Finishing feedlots will be extremely cautious when making their next round of purchases given the current margins. Demand for grass cattle will pick up in spring, which may provide underlying support for lighter weight cattle. The cow herd is in a contraction phase so ranchers may be more aggressive for feeders in spring if pasture conditions remain favorable. I feel the weakness in the live cattle prices from April through June will keep feeder cattle prices under pressure during this time.

Gerald Klassen analyzes 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]

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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