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Fed Cattle Prices Remain Soft

Fed cattle prices in Southern Alberta continue to hover near the 2009 lows. Steers were trading hands in the range of $79 to $81 in mid-November as the strong Canadian dollar continues to weigh on domestic prices. In addition to slower slaughter cattle exports, beef product values have also come under pressure as exports due to lower offshore movement. Triple A values in Alberta are now trading near two year lows as additional beef supplies are forced through retail channels. Carcass weights continue to increase and talk in the trade suggests we will see a 900-pound carcass average by the end of the year.

For the week ending October 31, average carcass weights in Canada were 892 pounds, up a whopping 45 pounds over last year. Additional weight has increased our beef production estimates for the final quarter of 2009.

While supplies are increasing, we are not seeing any change in the demand. U. S. unemployment is running at a 26-year high, with the national average at 10.2 per cent. Canadian unemployment has also edged higher over the past month reaching 8.6 per cent. Fed cattle prices are expected to stay under pressure for the remainder of 2009 as the Canadian dollar continues the upward trend. The function of the market is to encourage demand through lower prices.

In the November issue of Grainews, I mentioned the Alberta fed prices should trade at a $5/ cwt discount to values in the U. S. southern plains. We have now seen this forecast materialize as U. S. prices reached up to $87/cwt in mid-November. Canadian live cattle exports during October were rather slow in comparison to past years. However, we now feel that the current market structure will draw Canadian supplies to U. S. plants. COOL may be tempering the export program from reaching levels experienced during 2007 and 2008 but we should see an increase in southern movement during November and December of 2009.

U. S. beef exports are starting to improve and have potential to reach 2008 levels in the upcoming year. This is largely due to South Korean and Japanese demand starting to pull product offshore. U. S. domestic consumptive patterns remain sluggish as January through September beef demand was down 2.3 per cent but fed cattle demand was down 8.5 per cent in comparison to year ago levels. The sharp decline in live cattle demand is due to lower beef exports and sluggish hotel and restaurant consumption. This trend is expected to continue into the first quarter of 2010 and the industry is experiencing similar numbers in Canada.

Lower consumer income is the largest factor decreasing per capita beef consumption. U. S. October consumer confidence fell to 47.7, the lowest reading since May. We need to see a number above 75 to say that consumer purchasing and consumptive patterns are similar to 2007.

At this time, we are not seeing an increase in restaurant traffic and this sector is still on the decline. The U. S. consumer continues to tighten the wallet. Many resorts in the southern U. S. and Vegas are bracing for a difficult winter season as people from northern latitudes stay home. Another factor influencing restaurant traffic in the final quarter of 2009 is the H1N1 or swine flu. Reports suggest that fast food restaurant traffic is slowing down in urban centers where swine flu is more common. Even if children have a “normal flu” bug, parents are being more cautious. Adults visiting second-tier restaurants have also declined because there is a negative sentiment while the “swine flu” hype remains in the media.

Feeder cattle prices are starting to stabilize and are expected to slowly trend higher. Lower beef supplies in the U. S. domestic market will cause fed cattle prices to trend higher in the March through May period of 2010. While finishing feedlot margins are struggling in red ink, there appears to be opportunity to lock in profitability in the first and second quarters of 2010. Secondly, we will see lower supplies of feeder cattle in January through March and with an improving economy, the market should be fairly robust at this time.

The U. S. cow slaughter is expected to finish very similar to last year. I was earlier projecting the beef cow slaughter to decline by five to seven per cent, but talk in the industry suggests that U. S. producers will be more aggressive culling herds in November and December. This confirms my ideas of contraction for 2009 and 2010. I feel that it is a “buyers market” for cow calf producers looking to rebuild or expand their herds at this time.

Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For questions or comments, 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.

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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