The fed cattle market in the US has come under pressure largely due to the economic recession. For example, the operator of Ponderosa and Bonanza steak-house chains filed for Chapter 11 Bankruptcy in late October. This news follows a similar announcement by S&A Restaurant Corp, the operator Bennigan’s and Steak and Ale chains. Consumer traffic has slowed significantly and all beef serving restaurants are feeling the pain. Certain fast food chains such as McDonald’s and a few others appear to be managing alright so far. Fourth quarter beef production is actually down from year ago levels but the demand scenario has shifted significantly due to lower incomes. Competition from pork and poultry has also increased as consumers watch every penny to feed their families. Fed steers in Alberta were changing hands at $95.50/cwt to $97/cwt in late October while cattle in the U. S. southern plains were selling for $90/cwt to $92/cwt.
The weaker Canadian dollar has been supportive for local producers and there is potential for the trend to continue. Despite the lowering of interest rates on both sides of the border, investors are looking at the U. S. dollar for a safe alternative in these times of uncertainty. At this time of writing this article, it appears the downside potential is the range of 72 to 75 cents U. S.
The USDA reported cattle on feed as of October 1 at 10.4 million head, down five per cent from last year. Producers continue to be aggressive with marketings, which came in seven per cent above September of 2007; placements were down six per cent in comparison to September of last year. Canfax reported cattle on feed in Alberta and Saskatchewan as of October 1 at 788,362 head, down eight per cent from October 1 of 2007. Placements during September were up 15 per cent from year ago levels while marketings were down six per cent. There were no real surprises on this survey but the key will be if we see larger placements on the October and November reports in Canada and the U. S.
The cow slaughter in North America has been larger than expected increasing beef production estimates for the fourth quarter of 2008 and early in 2009. Due to weakening feed prices, we may see larger slaughter weights in upcoming months. Despite the lower numbers on feed, beef production for the remainder of 2008 and for 2009 will be very similar to year ago levels.
Broiler and pork production is 2008 is expected to be higher than earlier anticipated resulting in larger competition for beef. Higher weights for market hogs and an increase in pigs per litter have resulted in larger pork production. Broiler weights are also coming in higher than expected. The USDA has raised U. S. meat production forecasts for 2008 and 2009. Offshore movement of pork has slowed due to the economic problems in Asia and credit crisis around the world. This is having a temporary effect as the domestic market is forced to absorb larger supplies of all meat products. There is potential for exports of both pork and beef to slow further in upcoming months and is a major risk to the livestock markets. The problems in Asia are worse than the 1997 currency crisis and consumer spending has contracted significantly.
Inflationary factors that were driving the prices higher in the summer months have subsided. Weaker energy and lower production costs have decreased retail prices. Therefore, producers cannot expect live cattle futures to return to the highs experienced this past summer.
Fed cattle prices are expected to stay under pressure for the remainder of 2008 and then stabilize in the New Year. Barley and corn prices will likely trend lower as well during this time. We will need to see a significant drought in South America for feedgrain prices to trend higher. At this time, there is virtually no upside risk factor in barley, except the reluctance of producer selling in Western Canada. It will take some time for producers to become comfortable with the current feedgrain fundamentals.
Feeder cattle prices are expected to be stable. The weaker Canadian dollar is also underpinning the feeder market. Finishing feedlots are hesitant to be aggressive with purchases given the economic uncertainty. Despite the declining feedgrain prices, feedlot margins have been tight all year. Therefore, it is difficult to make the case for higher prices in the feeder complex. We may see an increase in feeder cattle numbers during November and December as cow calf producers were holding back on sales.
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.