It is rare to see two black swan events occur so close together. But that is what the market is currently facing. African swine fever (ASF) has created a giant protein gap in China and other Asian countries. It is unclear at this point how international demand for protein will be impacted by COVID-19 in many countries. COVID-19 has created significant volatility in the North American market as consumers stock up on supplies including beef, and switch to more retail purchases, away from restaurants. The length and severity of the pandemic’s impact on beef demand will largely be determined by the economic implications in each region. These two competing pressures on the demand side of the equation will contribute to volatility in the agriculture sector throughout 2020.
Canadian cattle inventories down
Total cattle and calves on January 1, 2020 were down 1.9 per cent or 220,000 head, at 11.22 million head. The drop was driven by fewer beef cows, down 2.6 per cent or 94,600 head; fewer steers (greater than one year old), down seven per cent or 82,900 head; and fewer beef breeding heifers, which were down 6.3 per cent or 34,800 head.
The 2.6 per cent decline in beef cow inventories is the largest annual drop since 2015 as producers faced a second year of challenging winter feed supplies and questionable pasture conditions. Beef cow culling rates stayed steady with 2018’s liquidation levels of 14 per cent.
Beef cows were up 2.8 per cent in Ontario. All other provinces reported beef cows down: 3.9 per cent in Alberta, 3.8 per cent in Quebec, 2.6 per cent in Manitoba, 2.5 per cent in the Atlantic provinces, 2.4 per cent in B.C. and 1.9 per cent in Saskatchewan. Eastern Canada continues to represent around 12 per cent of total beef cow inventories — steady with the average over the last decade.
Beef replacement heifers were also down 6.3 per cent to 515,000 head, with heifers down 7.4 per cent in the West and up 1.9 per cent in the East. The increase in the East comes entirely from Ontario where breeding heifers were up 5.4 per cent. Quebec (-3.2 per cent) and the Atlantic provinces (-7.6 per cent) both saw declines. These are the lowest breeding heifer numbers, excluding 2010-12, since 1984-87.
The calf crop was steady (+0.2 per cent), while steers were down 7.1 per cent and slaughter heifers were down 1.9 per cent. The smaller number of feeder cattle, combined with the larger numbers currently in feedlots, resulted in the number of beef feeders outside of feedlots being down 2.3 per cent at 3.58 million head. This is the smallest on record since the series started in 2000.
While the calf crop has been declining, slaughter rates have been supported by reduced feeder cattle exports to the U.S. and growth in feeder imports. In addition, the proportion of fed cattle and cull cows processed in Canada has been increasing.
U.S. cattle inventories have peaked
U.S. total cattle inventories on January 1, 2020 were down 0.4 per cent to be the first year-over-year decline since the 2014 expansion phase started. This ends one of the most aggressive expansion phases on record, with cattle inventories the largest since 2009. Producers appear to be near capacity of land and feed resources. In addition, tighter cow-calf margins have removed the incentive for the cow-calf sector to expand.
Beef cow inventories were down about one per cent, to be 150,000 head below 2018 levels. Given the significantly higher cow and heifer slaughter in 2019, it was not a surprise to see declining cow numbers.
Breeding heifer inventories were down two per cent from last year, to be almost 600,000 head below the 2017 peak. This was the third consecutive year of declining breeding heifer inventories. Breeding heifer inventories are the lowest since 2014. The U.S. beef cow herd has likely peaked for the time being.
The 2019 calf crop was reported one per cent lower than one year ago. On March 1 cattle-on-feed inventories were two per cent higher than a year ago, mostly a result of more heifers being put on feed. It was also partly related to dry conditions in parts of the southern U.S., resulting in cattle being placed in feedlots rather than pasture.
Market-ready cattle supplies through the first half of 2020 will generally be above a year ago; but the smaller feeder supplies and calf crop later in the year could lead to tighter market-ready supplies going into the fall of 2020, and likely into 2021. Tighter supplies may reduce U.S. feeder imports coming into Canada.
Looking forward to the 2020 calf crop: There is about one per cent (500,000) fewer cows and bred heifers to calve this spring, and combined with cow slaughter in the first quarter of 2020, which is at the highest rate since 2012, the 2020 calf crop will be smaller.
COVID-19 and surge at retail
Wholesale beef prices in March reflected short-term support from consumers observing public health orders and stocking up on groceries. Short-term impacts will likely be observed as cases of COVID-19 rise and the provinces strengthen public health measures. This will create a roller coaster for boxed beef prices. Wholesale beef prices had their biggest weekly increase on record from March 13 to 23. In just 10 days, the U.S. Choice cutout moved from US$208/cwt to US$257/cwt, nearing the all-time highs seen in May 2015 of US$265/cwt. But it came back down almost as fast and was back to US$235/cwt by April 1.
Medium-term, we may expect a negative impact on grocery demand as consumers adjust to staying home and working through their well-stocked freezers. With consumers encouraged to stay away from restaurants, the demand picture looks more negative. Some of the highest value beef is sold at foodservice. With consumer shifts to retail, beef will continue to move through the supply chain, but at a lower price point.
No matter the situation, people still need to eat. However, the ability for many to use disposable income for food is going to be significantly reduced. For example, service-based jobs filled by 15 million Canadians represent 83 per cent of the workforce, and many of these service sector workers, outside of essentials, are facing unemployment. Demand for beef is closely correlated with per capita income. Any hit to the average income level over the coming months will be negative for domestic demand. Mitigations to negative demand will come through as the Canadian government overcomes the challenges of rolling out measures that support the liquidity needs of Canadian workers and business, stabilizing the economy.
After tracking closely with year-ago prices throughout the first quarter of 2020, Canadian packers responded to the higher beef prices in mid-March with six-day processing schedules to reach one of the highest weekly beef production levels seen in the past several years. Packers will continue to add extra shifts as demand warrants. However, cutout prices quickly dropped and packers are expected to see greater challenges maintaining regular operations as COVID-19 spreads.
It was well known that meat supplies would be higher in 2020. Moving into the second quarter of the year, cow slaughter numbers are expected to seasonally tighten. Fed cattle supplies through the summer will be ample as March 1 cattle-on-feed numbers were nine per cent higher than a year ago. Domestic demand, exports and a smooth-running supply chain will be critical to insulate fed prices from excessive price pressure that the live cattle futures are currently pricing in.
International supply and Demand
Following the disruptions of COVID-19, it is easy to forget the over-riding market drivers that the year started with. Most significant was the strong international demand for beef in Asia following ASF. It is estimated that since ASF broke out in August 2018, 25 per cent of the world’s hogs are gone, with the Chinese hog herd cut in half. However, the productivity of those animals was nowhere close to the global average. Rabobank predicts China’s production of hogs declined an estimated 20 per cent in 2019, with another 20 per cent drop projected for 2020.
An outbreak of COVID-19 in China at the start of the year initially kept domestic pig prices high as the flow of protein imports slowed. As of late March, according to China’s agricultural ministry, feed mills, veterinary drug manufacturing and livestock slaughtering sectors resumed production as the COVID-19 outbreak eased. Livestock markets are also resuming and a surge in imports is expected in the second quarter of the year as it becomes easier once again to access global transportation through ports.
Demand in China for protein in general remains strong, but there is risk of a new outbreak from the large number of Chinese students living overseas who returned to China when their school or university classes were suspended. As of the last week of March, imported cases have now surpassed new domestic cases in China. For the first half of 2020, markets will ebb quickly and in unforeseen ways as they remain influenced by subsequent pandemic waves.
In addition, Australia has seen solid rains in the first quarter, resulting in a sharp drop in cattle slaughter as herds are restocked after nine years of drought. Cattle inventories are now the lowest since the 1970s. Beef production is projected to be down 15 per cent in 2020, with exports down 19.5 per cent. Australia’s main export markets are China, Japan, the U.S., South Korea and southeast Asia. In 2019, exports were down to all countries except China — which was their prioritized market. This trend is expected to continue in 2020, with reduced exports of lean manufacturing trim headed for North America.
New Zealand has experienced disruptions to its supply chain with an expected reduction in cattle slaughter between March and June. This is during their cull cow run, which typically supplies lean manufacturing trim to mix with hamburgers for the spring grilling season in North America. Smaller supplies from both Australia and New Zealand are expected to support cull cow prices in Canada.
Fed cattle prices
Alberta’s fed cattle prices retracted from $162/cwt in January 2020 to $150/cwt in February, but levelled off in March at $147/cwt. After being steady to higher than a year ago in January and February, prices were six per cent or $9/cwt below last year in March, as the uncertainty from COVID-19 impacted markets.
Ontario fed cattle prices were relatively steady in the fourth quarter of 2019 between $130-134/cwt, before rallying to $142/cwt in January 2020 then dropping to $138/cwt in March 2020. The average price in March was four per cent or $5/cwt higher than last year.
The Alberta-Ontario price spread for March 2020 was $9.51/cwt. It remains close to the February 2020 spread of $9.70/cwt, narrowing significantly from the $20.13/cwt gap in January that looked more reminiscent of late fall 2019. Despite the closure of Ryding Regency, the Alberta-Ontario spread in December and January were similar to those seen last year.
Expect ongoing price volatility into the next quarter edged on by sudden policy shifts and consumer and supply chain response.
Cow prices in Alberta still hang below the five-year average that remains propped up by prices in 2015. From January to March 2020, prices traded narrowly between $87/cwt and $88/cwt for D1,2 cows. Week-over-week in 2020 however, prices continue to rise. There’s a similar story in Ontario, where D1,2 cow prices have risen to $72/cwt in March. This is still below the five-year average, even though prices are trending up. In March, prices were up 1.2 per cent from last year in Alberta and up seven per cent in Ontario.
Feedlot margins have been challenging over the last two years, with more red than black ink on both the cash market and hedgeable options. While losses narrowed in January and February, they widened again in March to -$10/cwt for yearling steers and -$14/cwt on steer calves. The outlook over the next six months is generally negative, with losses based on the live cattle futures. If prices were locked in when feeders were placed, there is potential for brief reprieve for yearlings coming to market in April and May and steer calves coming ready in July.
Feeder cattle prices
Alberta 500-600 lb. steer prices have increased since the last quarter in 2019, coming up from $218/cwt in Q4 2019 to $227/cwt in Q1 2020. Prices in March 2020 are slightly higher at $225/cwt when compared with March 2019 at $223/cwt. Ontario 500-600 lb. steer prices have sunk in March 2020 to $213/cwt after climbing to $226/cwt in February 2020. In March prices were up 0.6 per cent from last year in Alberta and up eight per cent in Ontario.
Lower fuel prices have resulted in a lack of profitability in the ethanol market, leading to several plants shutting down. The decreased supply of DDGs will force feedlots to change rations. But just as ethanol demand pushed feed grain prices up in the past, reduced demand from ethanol plants is expected to make more feed grain available at a lower price over time. This is just one more example of how there are multiple impacts from COVID-19 that are still playing out in the markets.
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. Consequently, a higher ratio has negative implications on feedlot profitability as more dollars are spent placing new cattle.
Year-over-year replacement ratios are higher in the East and West when compared with Q1 in 2019, except for short-keep steers, who remain the same or at a slight decline. From the Q4 2019 to Q1 2020, the replacement ratios were down one to 10 per cent in the West, except for yearling steers, which went up six per cent, and two to nine per cent in the East.