Strong demand has supported remarkably steady feeder cattle prices going into the fall run despite uncertainty around feed grain production with a disappointing harvest. Feedlot margins in the first half of the year were better than expected, even though they were negative in the second half, in the face of larger protein supplies in North America and an uncertain trade climate. While cow-calf profitability remains positive on average, it does not appear to be encouraging any substantial heifer retention. The Canadian beef cow herd was down on July 1, 2018 to be the smallest since 1988. The beef cow culling rate has increased to liquidation levels, with larger cow marketings.
Canadian herd down for a second year
The Statistics Canada July 1, 2018 inventory report showed a decline in the Canadian cattle herd. Total cattle inventories were down 0.8 per cent at 12.4 million head, to be the smallest since 1988. Beef cows were down 1.2 per cent but remain above the 2015 lows. This may signal the end of the very short expansion phase that resulted in a 1.7 per cent increase in beef cows between July 2015 and 2017. This would be the smallest expansion phase since the 1980s when beef cows increased only 1.9 per cent from July 1979 to July 1980 before consolidating for another three years.
Regionally, the majority of the herd decline occurred in Western Canada (-1.3 per cent), while Eastern Canada was basically flat. The only increase was in B.C. where beef cow numbers were up 2.8 per cent resulting in the largest breeding herd since 2009. B.C. has been slowly rebuilding their herd since making a low in 2010. The biggest declines were in Manitoba (-2.6 per cent) followed by Saskatchewan (-1.4 per cent), Alberta (-1.4 per cent), Ontario (-0.5 per cent), Atlantic region (-0.5 per cent) and Quebec (-0.1 per cent).
Beef replacement heifer numbers were down 2.6 per cent at 669,900 head; this remains above the 2010 low and the five-year average (662,300 head). Western Canadian heifer retention was down three per cent, while Eastern Canada saw a slight uptick (+0.4 per cent), driven entirely by Ontario, which had 3.3. per cent more breeding heifers.
Despite the January 1, 2018 beef cow herd being slightly larger than a year ago, calves less than one-year-old were down 1.3 per cent. Poor calving conditions that sent more cows to market this spring may have contributed to the lower calf number. At 3.99 million head, the calf crop was below 4.0 million head for the first time since 1990.
Both feeder imports and exports are up in the first half of 2018, but Canada remains a net exporter of feeder cattle. The smaller calf crop combined with higher cattle-on-feed inventories has meant the supply of feeders outside of feedlots continued to decline (-3.1 per cent). Tighter supplies have encouraged feeders to stay in Canada. Despite Alberta having a feed cost disadvantage to most feeding regions in North America, the strong fed cattle basis is attracting feeders to remain in Western Canada.
U.S. cattle inventories – expansion slowing
The USDA July 1 total cattle and calf inventories were up one million head or 0.6 per cent to 103.2 million head. Although the USDA did not publish a July 1 inventory report in 2013 and 2016, it is safe to say this is the largest July 1 cattle inventory since 2008. While it is up from last year, the rate of herd expansion has slowed. Beef cow numbers are 0.9 per cent above last July, but the rate of increase is down from January when beef cows posted a 1.6 per cent year-over-year increase, and the year before when cow numbers were up 3.5 per cent over the year before. Beef heifer replacements on July 1 declined by 2.1 per cent year-over-year.
The 2018 U.S. calf crop was up 1.9 per cent at 36.5 million, the largest calf crop since 2007, and a full 8.8 per cent or three million head increase over the 2014 low for this cycle.
The U.S will likely see continued year-over-year increases in beef production for at least the next two years. While current feeder supply is as large as 2010, there are two million more head of cattle in the U.S. compared to 2010, which will keep the beef supply chain full. Even though the cattle herd appears to be stabilizing, the larger calf crop and higher cow and heifer slaughter will continue to add to beef production in the medium term.
Culling rates up, looking at liquidation
Cow slaughter was up 14 per cent from January to September, and exports up 18 per cent, leaving cow marketings up 15 per cent year-to-date. The beef culling rate is estimated at 13.7 per cent. This is slightly up from 11.9 per cent in 2017, and in line with other liquidation years (2013, 2014).
Larger cow marketings, combined with beef imports up five per cent from January through July, has been pressuring cow prices. Alberta D1,2 cow prices averaged $85/cwt in September, down 2.4 per cent from last year. Ontario cows at $67/cwt were down 11 per cent from last September. Alberta remained at an approximate $15 premium to the U.S., and steady with 2017. Ontario cow prices have averaged $6.26/cwt below the U.S. utility prices in 2018, compared to a $0.40 premium in 2017.
The heifer slaughter ratio, also known as the heifer:steer ratio, is at 64 heifers for every 100 steers, similar to the same time in 2017 and the 20-year average of 69.
The female:male disposal ratio which measures the number of females (heifers and cows) disposed for every male (steers and bulls) is the best indicator of whether the herd is declining or growing. In 2018 the female:male ratio is at 1.00, up from 0.92 in 2017. The higher ratio comes mainly from larger cow marketings. The year-over-year increase indicates that the Canadian beef cow herd could be headed for another liquidation phase. Generally speaking, the further the ratio rises above 1:1 the more rapidly the beef herd contracts.
Supply and demand
Beef production up in 2018
Canadian beef production has been steadily increasing from the 2015 low despite only modest growth in the beef cow herd with reduced feeder exports to the U.S., a greater proportion of slaughter cattle being processed domestically and over the last year, imports of U.S. feeders. In 2018, beef production (including slaughter exports) is projected to be up 16.4 per cent from the 2015 low.
Domestic beef production was up seven per cent from January through September with fed beef production up six per cent and non-fed beef production up 13 per cent. Production from live slaughter exports are projected to be down 18 per cent for the year as proportionately more cattle are processed in Canada at 84.4 per cent in 2018 compared to 80 per cent in 2017. This is the highest proportion since 2005 when market access limited live exports to the U.S. for part of the year.
Larger domestic slaughter has supported packer utilization levels which have averaged 86 per cent year-to-date compared to 82 per cent in 2017. Seasonally, the third quarter with peak slaughter, averaged 91 per cent utilization at federally inspected plants.
Demand supportive to prices
Despite larger production, prices have held up surprisingly well with continued strong domestic and international demand. Beef exports from January through August were supported by larger production, being up four per cent in volume and eight per cent in value. Exports are up to Japan (+17 per cent) and Southeast Asia (+15 per cent) on small volumes, with most of the gains going to the Philippines, while volumes to Vietnam, Taiwan and Indonesia are down, and represent low value items. This is followed by the U.S. (+5.4 per cent), China and Hong Kong (+3 per cent). Exports are down to Mexico (-14 per cent), MENA (-16 per cent), and South Korea (-36 per cent).
Overall, volumes to Asia continue to grow with volumes projected to be over 70,000 tonnes in 2018. This is driven by strength in Japan which is projected to surpass the previous record high made in 2001. Japan is set to become the second-largest market for Canadian beef, with eight per cent of export sales.
One of the challenges to growing exports to all Asian markets is the competition and interest in the same cuts from the carcass. Growing these markets will depend on first growing beef production and second building interest in a larger number of cuts on the carcass.
While volumes to China and Hong Kong are currently running slightly above year-ago levels. Multiple African Swine Fever (ASF) cases have been reported in China and hogs are being destroyed. This highly contagious disease does not affect humans, but frequently results in death of domestic pigs and wild hogs within 10 days. This has the potential to reduce Chinese pork production and increase import demand for protein.
Attractive retail beef prices
As expected, larger protein supplies in the North American market have been pressuring retail prices. Retail beef prices have been steady around $19/kg from May through August 2018 and are 2.5 to five per cent below last year, but remain three to 4.3 per cent above the five-year average.
The decline in beef prices has made it more attractive at the meat counter with competing meats. The beef has dropped from being 1.63 times the price of pork in 2017 to 1.56 in 2018. This is the lowest the beef-to-pork ratio has been since January 2016. Beef has gone from being 2.64 times the price of poultry in 2017 to 2.62 so far in 2018.
Prices and profitability
Fed cattle prices
Alberta fed steer prices had solid support this summer at $142/cwt. Prices moved 13 per cent lower from a January high to a summer low in August, and have been 2-9 per cent above last year in the third quarter and relatively steady with the five-year average. Alberta and Saskatchewan cattle-on-feed inventories on September 1, 2018, were up 17 per cent from last year. Placements were up 19 per cent as dry conditions in some regions resulted in cattle of all weight classes (calves and yearlings) being pulled off grass early. This is expected to keep marketings large as we move into the fourth quarter. Prices are holding up well in the face of large protein supplies thanks in large part to demand. Look for demand, both domestic and international, to be the driving factor for fed cattle prices in the fourth quarter.
Feedlot margins started the year in the black but have moved into the red over the summer. From January through September 2018, margins averaged from $4 to $24/head in the red on the cash market. Negative margins throughout the summer were expected to pressure the feeder market; however, they turned out to be not as bad as anticipated. It appears that the feeder market is being supported by strong basis contract options going into 2019.
Feeder steer prices (850 lb.) recovered from their spring low in April with Alberta and Ontario feeders averaging $201 and $206/cwt, respectively, in September, a six per cent increase from last year for Alberta and 10.4 per cent for Ontario.
While the 850-lb.-feeder basis remains stronger than the five-year average, it has been generally weaker than 2017 at -$0.64/cwt in September, compared to +$5.54/cwt last year. Feeder exports at 151,000 head are up 58 per cent from January to September on a weaker feeder basis, but remain 22 per cent below the five-year average of 193,400 head.
The calf market has been trading generally steady between $218-$231/cwt over the last year with Alberta prices averaging $226/cwt in September, up seven per cent from last year. The Ontario market has seen some larger fluctuations with a range of $202-$236/cwt over the last year, averaging $218/cwt in September, up 2.6 per cent from last year. Cow-calf profitability remains positive on average this fall, but it does not appear to be encouraging any substantial heifer retention.
Dry conditions in parts of the Prairies over the summer followed by a wet September has made for a disappointing harvest for grain producers and uncertain feed availability for beef producers, encouraging producers to explore alternative feedstuffs, particularly for cow herds. Lethbridge barley prices have rallied 59 per cent from a low of $164/tonne in March 2017 to a high of $261/tonne in May 2018. Over the summer, prices fluctuated between $245-260/tonne with an average of $256/tonne in September, up 27 per cent from last year.
High feed costs are hanging over the Western Canadian calf and feeder market. Alberta has some of the highest feed costs in North America. A large U.S. corn crop has kept corn prices moderate, averaging C$176/tonne in September, up eight per cent from last year. Ontario corn, at $197/tonne, is up 11 per cent from last year but is well below Alberta. Given the larger cattle-on-feed numbers than a year ago, western Canadian feedlots continue to import corn from the U.S. to manage their feed supplies and costs.
The lower the replacement ratio the fewer dollars the feedlot must pay to replace a fed animal with a feeder; conversely, a higher ratio means the feedlot must pay more per pound to replace those animals. Replacement ratios moved higher in the second and third quarters. In the West, replacement ratios were slightly below year-ago levels in the third quarter, for the first time since the first quarter of 2017. Over the last year-and-a-half replacement ratios had been steadily increasing — pushing up break-evens at the feedlot. In the East, the ratios exceeded year-ago levels in the third quarter and have been steadily increasing over the last 12 months.