The fed cattle market in Southern Alberta was hovering in the range of $82 to $85 in early January. At the same time, market ready cattle were trading at $84 to $85 in the U. S. southern plains. The market is still struggling with the demand equation despite the potential for lower beef supplies during spring. Off shore exports have slowed since November and the market is not looking for a full recovery in exports until the second half of 2009.
Domestic consumption is still struggling as restaurant demand shows no signs of improvement. Resorts are trying to attract customers through lower prices, but major destinations are still running significantly below capacity. One Canadian grocery retailer I talk to missed their beef shipment and they didn’t run out of supplies. These scenarios reflect the overall picture for the beef complex
Cattle on feed numbers in Alberta and Saskatchewan were running eight per cent above year ago levels as of December 1. We have seen some feedlots with renewed optimism, but other finishing lots are running significantly below normal levels. Placements during November were up 12 per cent over November 2007. Many cow calf producers were holding back on marketings and we are expecting steady placements through the winter months.
On-feed numbers in the U. S. were down six per cent as of December 1; placements during November were down five per cent. It is important to note a window of opportunity given the placement structure since August of 2008. According to the USDA, early in fall, the lower placement numbers were composed of mostly 800-pound-plus cattle. Since October, the bulk of the placements have been less than 700 pounds; therefore, supplies could become abnormally tight in the early spring period. This will be an opportunity to catch up on sales and also place hedges in the deferred months. This will also cause beef production to surge in the summer time frame as the light weight cattle come on the market. This would weigh heavily on cattle prices during late June, July and August.
Looking at the second and third quarter projections, supplies move from under year ago levels to above 2008. Finishing feedlots will want to watch this closely for their 2009 marketing and hedging strategy.
Despite the global recession, beef exports for 2009 are expected to be up just over three per cent. The increase will likely come in the last half of 2009. Export business started to slow in November and talk in the trade suggests offshore movement is still rather sluggish. Therefore, the domestic market is absorbing larger supplies in the short term.
Canadian live cattle exports to the US have been tempered with the Country of Origin Labeling law (COOL). Apparently, U. S. plants can take Canadian cattle until April 1 without penalty, but many packers are implementing their labelling policy earlier to make sure there are no problems later on. Some plants are allowing Canadian animals one or two days per week, but overall exports to the U. S. are down significantly. There is potential for further basis depreciation on Canadian cattle later in spring as we approach the April 1 deadline.
Feeder cattle values remain under pressure due to the uncertainty in the live cattle situation. Despite the lower barley prices, finishing feedlots are hesitant to be aggressive with purchases due to the limited live cattle exports. Backgrounding operations should be aggressive with marketings at this time and hold few numbers into the spring period. This COOL is a huge risk and we don’t know how the market will respond.
The economic situation will also be a main factor driving beef prices in 2009. U. S. unemployment is now at a 16 year high as there were 2.6 million jobs lost in 2008. There were 31 million Americans living on food stamps in December. Canada tends to be on an 8 month lag compared to the U. S. timeframe. Lower incomes in Canada and the U. S. will continue to limit beef consumption, especially in the higher end cuts.
There is potential for a seasonal rally in March. Lower supplies of market-ready cattle in the U. S. and a temporary stabilizing of the U. S. economy should cause prices to percolate higher. However, this will be an opportunity to lock in forward sales with Canadian plants. I’m expecting further basis depreciation in the summer months along with a build up of available supplies. This may be further amplified if the spillover effects of the U. S. influence the Canadian economy more significantly.
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 by email at [email protected] or by phone at 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.