Beef Watch: Canadian cattle inventories decline, U.S. herds expanding

Beef Watch is prepared by the staff of Canfax and Canfax Research Services, divisions of the Canadian Cattlemen's Association

While U.S. herd expansion is underway, the Canadian beef cattle herd remains in the consolidation phase. Cow-calf and feedlot profitability improved significantly in 2014 with record cattle prices, lower feed costs and strong beef demand, but risk factors such as weather conditions, input costs and competition from pork and poultry need to be closely watched in 2015.

Cattle Inventories

Canadian Inventories Continue to Decline

Canadian cattle inventories on January 1, 2015 were down 2.5 per cent at 11.9 million head, the smallest since 1993. Producers continued to send cows to the market aggressively in 2014, while heifer retention was subdued.

Beef cow inventories were down 2 per cent at 3.8 million head, the smallest since 1992. The largest declines were in the major producing provinces of Alberta (-3 per cent) and Saskatchewan (-2 per cent) followed by B.C. (1.4 per cent), Manitoba (-1.4 per cent), the Atlantic provinces (0.9 per cent) and Quebec (-0.3 per cent). The only increase was seen in Ontario (+0.7 per cent). The beef herd has been in the consolidation phase since 2011 and is anticipated to move into expansion late in 2015 or 2016.

cattle inventories January 1

Beef breeding heifer numbers were also down 1.5 per cent at 531,100 head. Lower breeding heifer numbers is not surprising as heifer slaughter was up 10 per cent in 2014 and heifers as a percentage of total feeder exports jumped from 58 per cent to 67 per cent. Many producers did not have additional dollars in their pockets to invest in heifers last summer as they had sold before prices took off. The real question is: what will producers do this summer? Will replacement heifer numbers increase in the July 1 report? And by how much?

canadian beef heifers January 1

Inventories of steers, slaughter heifer and calves were down 5.4 per cent, 4.9 per cent and 2.5 per cent respectively. Subsequently the supply of feeders outside of feedlots is down 3.7 per cent or 157,000 head. If this impact was entirely felt in the 2015 fed cattle marketings this would imply a reduction of around 6 per cent and could have a significant impact on 2015 beef production.

U.S. Herd Expansion in Progress

Total cattle and calf inventories on January 1, 2015 were up 1.4 per cent to 89.8 million head with many categories up 1-2 per cent. This was the first increase since 2007. Despite being up, total cattle inventories are still 7 per cent below the 2007 peak and remain near their 60-year lows.

Beef cow inventories recorded the first increase since 2006 with numbers up 2 per cent to 39 million head, but remain 9.2 per cent below the 2006 peak. The major cow-calf states that were hardest hit by drought have shown the biggest rebound in beef cow numbers. This includes Texas (+7 per cent), Oklahoma (+6 per cent), Colorado (+5 per cent), and Kansas (+4 per cent). In 2014, beef cow slaughter as a percentage of total beef cow inventory declined for the third consecutive year to 9 per cent, pushing the industry into expansion.

US cattle inventories January 1

The 2014 calf crop was estimated at 33.9 million head, up 1 per cent from 2013. This is the first increase in the calf crop since 1995 but is questionable as breeding stock (beef cows and replacements) on January 1, 2014 were down 0.1 per cent. A larger calf crop would require a jump in reproductive efficiency coming out of the hot, drought years in the South — which is possible. More probable is the larger calf crop anticipated in 2015 with a larger breeding herd which will increase beef production at some point in late 2016 and early 2017.

Steers weighing 500 lbs. and over were up 0.7 per cent at 15.8 million while heifers for slaughter were down slightly by 0.2 per cent at 8.8 million head. Calves less than 500 lbs. were up 0.9 per cent at 13.7 million head. Cattle and calves on feed for slaughter in all feedlots were up 1 per cent at 13.1 million head while feeder and calf supply outside of feedlots was up 0.5 per cent or 133,000 head at 25.2 million head. The increased cattle supply outside of feedlots could mean that there will be slightly more feeder cattle available to place on feed in 2015 supporting fed marketings. Breeding heifers retained from the 2015 calf crop will also be an important factor for feeder supplies later this year.

Cycle Indicators

Cow Culling Rate Remained High

In 2014, record-high cattle prices were sending signals for herd expansion, but many producers took advantage of the higher prices to rebuild equity or invest in infrastructure improvements. Canadian cow marketings in 2014 were down 6 per cent with domestic slaughter down 9 per cent and exports down 1 per cent. This decline is modest compared to the U.S. where beef cow slaughter was down a dramatic 17 per cent. The Canadian beef cow culling rate dropped marginally in 2014 to a projected 13.8 per cent compared to 14.3 per cent in 2013 and the long-term average of 11 per cent, so still at liquidation levels.

canadian beef cow culling rate

Moving into 2015, cow prices continued to be well supported by tight supplies and strong lean-trim demand. Alberta cow prices increased from $133/cwt in January to $144/cwt in March to be 45 per cent or $45/cwt higher than a year ago. Cow marketings are showing signs of slowing down with cow slaughter down 12 per cent and exports down 29 per cent year to date.

Weather conditions moving into spring and summer will be a critical factor to watch on both sides of the border, as drought or flood will impact pasture carrying capacity and feed prices, and in turn influence the trend in cow slaughter and cattle prices. Long-range weather forecast projects that El Niño will play a major role in Canadian weather in the early part of 2015, which could lead to a drier and warmer summer in the Prairies. In the U.S., Mid-west weather is expected to be favourable for a good crop with summer heat being far to the West; the main concern for summer drought will be in the inland Northwest.

Female-to-Male Disposal Ratio Slightly Lower

The female-to-male disposal ratio which measures the number of females (heifers and cows) disposed for every male (steers and bulls) is an important cycle indicator. In 2014, the ratio declined from 1.05 to 1.01, indicating more female cattle are being held in the herd compared to 2013. However, the ratio remains well above the average seen during previous expansion years of 0.94, indicating that the Canadian herd remains firmly in consolidation phase. The lower ratio in 2014 comes entirely from reduced cow marketings as breeding heifer inventories were down 1.5 per cent on January 1, 2015. In early 2015, the female-to-male disposal ratio remains steady with last year at 1.04.

Heifer-to-Steer Disposal Ratio Up

In 2014, the heifer-to-steer disposal ratio posted the first increase since 2006, up from 0.60 to 0.62. The higher ratio indicates proportionately more heifers in the slaughter mix. The dramatic increase in cattle prices coupled with strong demand from the U.S. pushed heifer marketings up 10 per cent in 2014.

Heifer slaughter in 2015 remains 5 per cent above last year, but fed heifer exports have declined 32 per cent. An encouraging sign has been historically low heifer placements into finishing lots in January and February. At 20-26 per cent of total placements this is well below what has been seen over the last decade of 28-45 per cent and the lowest since January 2004 (25 per cent). This is the first indication that 2015 might be the start of the next expansion phase.

Prices and Demand

Record Prices and Improved Profitability

In 2014, cattle prices recorded the largest annual increases since the 1980s with Alberta fed steer prices up 29 per cent, yearling prices up 49 per cent, calf prices up 55 per cent and cow prices up 46 per cent. For the beef market, Canadian cut-out prices were exceptionally strong in 2014 with AAA up 31 per cent at $255/cwt, and AA up 32 per cent at $250/cwt. Nominal retail beef prices in 2014 averaged $17/kg up 16 per cent from 2013 while pork was up 20 per cent at $12/kg and chicken up 2 per cent at $7.23/kg.

Alberta 550 lb steer prices

With feeder and cow prices posting the largest growths across the supply chain, cow-calf producers are enjoying a substantial improvement in profitability. While profit levels between different cow-calf producers can be highly variable, the average return per cow in Alberta is estimated at $672/head, up 275 per cent from 2013 and more than 10 times higher than the long-term average.

The rising markets in 2014 combined with the cheaper cost of gains and lower dollar created significant profit opportunities for feedlots. It is important to note that as the cash market exploded, feedlots may have contracted a significant number of their cattle, at lower profit levels.

Strong bull years like 2014 are frequently followed by a stabilization year that has more typical seasonality. The eastern cow market appears to have already put in a spring high in early March, while the West looks to be testing $145/cwt. Heavy feeder prices have been flat in the first quarter and the summer price rally will be influenced by crop conditions this summer. Fed cattle prices are sensitive to changes in the dollar which remains at the lowest level since 2009.

Replacement Ratios

Replacement ratios show how much higher feeder cattle prices are per pound of fed cattle. The lower the ratio the fewer dollars a feedlot needs to replace an animal. Conversely, a high ratio implies the feedlot must pay more per pound to replace an animal. Consequently, a higher ratio has negative implications on feedlot profitability, if feed costs are constant.

With the larger increase in feeder prices, replacement ratios in both Western and Eastern Canada moved steadily higher throughout 2014. In the first quarter of 2015, the ratios have eased lower but remain well above last year’s level. In the West, replacement ratio for heifer calves at 1.59 posted the largest year-over-year increase (+27 per cent) among all categories followed by steer calves (+17 per cent), yearling heifers (+15 per cent), yearling steers (+8 per cent) and shortkeep steers (+7 per cent). Replacement ratios in the East are generally lower than the West, but the year-over-year increases for some categories were more significant. Specifically, the ratios for heifer calves (+24 per cent), steer calves (+22 per cent), yearling heifers (+24 per cent), yearling steers (+8 per cent), and shortkeep steers (+11 per cent).

In addition to high feeder costs, rising feed prices in Western Canada are also placing more risks on feedlot profitability as break-evens are pushed to record highs. In March, Lethbridge barley prices were up 14 per cent from last year, while Omaha corn prices were down 18 per cent. The feeding disadvantage in Canada narrowed in February but a lower dollar continues to encourage feeder exports and bring strong competition for feeder cattle for local feedlots.

projected break-even versus market price

Demand Remains Strong

While retail beef prices moved significantly higher in 2014, per capita consumption is projected to be down 5 per cent. The Retail Beef Demand Index is an indicator of consumer willingness to pay by evaluating per capita consumption and deflated retail prices. Since 2011, the index has rebounded from the low made following the global financial crisis and is projected to be up 6 per cent in 2014 to 109.5 (Index 2000=100). This is the third-strongest demand since 1990 with only 1990 and 2003 being stronger. The uptrend of the demand index in the past five years shows that beef demand has been resilient to high prices, but it remains uncertain how demand will hold up in 2015 with larger pork and poultry supplies.

Global beef demand has been very strong in recent years with a growing population, increased incomes, and protein consumption in developing countries and the economic recovery in the U.S. The International Demand index for Canadian beef has been increasing since 2010 and posted the biggest annual increase of 27 per cent in 2014. The strength in global beef demand is projected to continue in the next decade with the fastest growth expected in Asia and Middle East and North Africa.

Trade Balance Back to Positive Value

Strong global demand, larger domestic beef production, a weaker Canadian dollar and improved market access to some Asian markets have been supportive to beef exports and pushed prices to record highs. Beef exports in 2014 were up 14 per cent in volume to 317,728 tonnes and up 46 per cent in value to $1.94 billion. While volumes remained 5 per cent smaller than 2011, export value was the highest since 2002. Per-unit export price averaged a record high of $6.10/kg, up 28 per cent from 2013 and up 43 per cent from 2002. U.S. remains Canada’s top market accounting for 70 per cent of total beef exports followed by Hong Kong (8 per cent), Mexico (7 per cent), Japan (6 per cent), Mainland China (2 per cent) and South Korea (1 per cent). In many of Canada’s major markets, U.S. beef is a key competitor for Canadian products. One of the biggest advantages of Canadian exports moving into 2015 is a lower exchange rate compared to the U.S., which will improve price competitiveness.

canadian beef export volume

Beef imports in 2014 were down 14 per cent in volume to 183,665 tonnes and down 1.8 per cent in value at $1.37 billion. Per-unit price averaged $6.60/kg, up 14 per cent from 2013. The U.S. remains the largest supplier with 71 per cent of market share despite a 21 per cent decline in volume. Australia moved up to the second place with 15 per cent of market share as volumes jumped 56 per cent higher. New Zealand dropped from being the second-largest supplier in 2012 to being tied in the third place with Uruguay with 6 per cent of market share. In general, grinding beef as a percentage of total import increased from 64.6 per cent in 2013 to 66.6 per cent. Non-NAFTA imports increased 9.4 per cent in 2014 to 52,883 tonnes. This is still well below the annual quota of 76,409 tonnes. In 2015, beef production by Canada’s major suppliers is projected to be down with herd expansion in the U.S. and improved moisture conditions in Australia. This combined with elevated global prices and a weakening dollar will continue to limit imports and constrain beef supply in 2015.

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