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Curse Of The Strong CDN $

Fed Cattle prices in southern Alberta remain under pressure. Strong Canadian dollar, sluggish live cattle exports along with lower wholesale beef prices have been the main factors weighing on the cattle market. Feedlot margins are still negative $100 to $140 per head, however, feeder cattle prices have held up fairly well given current feedlot economics. Fed heifers and steers have been selling in the range of $79 to $82. These are the lowest prices we have seen all year. Cattle were trading in Nebraska at $127 to $129 on a carcass basis in mid-October and shifting hands at $80/ cwt to $82/cwt on a live basis. U. S. carcass weights are approximately

10 pounds above last year, while Alberta carcass weights are a whopping

30 pounds above year-ago levels. This is causing fourth-quarter beef production to exceed earlier projections.

U. S. beef exports were down nearly 100 million pounds in the third quarter compared to last year. This caused larger beef supplies to be sold in the domestic market. For the fourth quarter, U. S. exports are expected to be similar to year-ago levels. U. S. beef export demand is expected to recover in the first half of 2010. This will cause domestic beef supplies to shrink in 2010. Total U. S. beef supplies available for the domestic market are expected to be down 200 million pounds in the first quarter of 2010. This will be positive for fed cattle prices in the March time frame.

For 2010, we are expecting smaller production of pork, and beef and a resumption of exports to 2007 and 2008 levels. Total domestic U. S. pork and beef supplies for 2010 are expected to be down by 900 million pounds in comparison to 2009. U. S. Poultry stocks are expected to increase by 700 million pounds in 2010 but this is a minor factor as it does not compete with red meat directly.

Canadian slaughter cattle exports are coming in sharply below year ago levels. This is causing more cattle to be pushed through domestic plants. Canadian fed cattle prices have potential to trade at a $5 to $6 discount to U. S. prices in the southern Plains. The market is functioning to encourage demand.

Economic data reflects that the North American economy is stabilizing. The U. S. Federal Reserve is expected to start increasing rates in the first quarter of 2010. Crude oil fundamentals are expected to tighten next March which should cause energy values to increase. This strength will spill over into all commodities. There is a major risk of inflation starting next year. Inflation is the only way the U. S. will be able to pay off their large deficit. If the U. S. economy starts to move into an expansion phase in the first quarter of 2010, beef and cattle prices will start to percolate higher in the second quarter. Look for stronger fed cattle prices next spring, but the market has some pain to absorb in the short term.

The Canadian dollar has potential to reach the 2007 highs near 1.10 U. S./Cdn. This is a major risk over the next six months on the feeder and fed cattle markets. In addition to lower cattle exports, beef product exports will be down from earlier expectations and imports of U. S. beef will increase in Eastern Canada.

FEEDER CATTLE OUTLOOK REMAINS SOFT

Feedlot margins in southern Alberta have been deep in red ink over the past month limiting buying enthusiasm for feeder cattle. In addition to weaker domestic demand, feeder cattle exports are down sharply. In the previous issue, I mentioned that larger supplies of Manitoba feeder cattle would be sold into Alberta due to the slower exports. The industry is now seeing this shift on a larger scale. It also looks like many cow-calf producers were holding back on sales as there are still a fair amount of yearlings coming on the market.

Feeder cattle are expected to stay soft and will only start to turn higher when feedlot margins improve. Alberta feeder cattle were trading at a premium to values in Nebraska and Texas during September and first half of October. This also slowed the export program given the unrealistic demand from Alberta feedlots. We should see the Alberta feeder cattle market trade at a discount to the U. S. market given the burdensome supplies coming available before year end. Herd liquidation is also causing supplies to be larger than earlier anticipated. Cow-calf producers are not holding back enough cattle for herd maintenance and in many cases are liquidating. Many producers are also getting close to retirement.

We are looking for lower calf crops in 2010 and potentially in 2011. The market will likely experience a fundamental shift due to the sharply lower supplies and strong improvement in demand in the latter half of 2011 and 2012.

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