COVID-fuelled recession clips cattle markets

Prepared by the staff of Canfax and Canfax Research Services, divisions of the Canadian Cattlemen’s Association

While cattle markets appear to have stabilized following the initial impact of the COVID-19 pandemic this spring, uncertainty surrounding the fallout of the global pandemic has created longer-lasting effects. Canadian cattle inventories continue to shrink as the U.S. cattle herd reaches its peak. What happens next will depend on domestic and global demand. All G20 countries, or parts thereof, have entered a recession in 2020, which have an impact on consumer behaviour and global trade. The length and depth of each recession will vary as public health issues are being addressed in a myriad of ways. While the fed market in the West has been hard hit, the East experienced supportive prices this year. Few lasting effects trickled down to the non-fed and feeder markets. Cow-calf profitability has been supported by outstanding demand for beef at retail this year and lower feed costs. The tone at auction this fall will certainly be a cautious one, though, as the outlook for fed margins remains flat.

Cattle inventories

Canadian cattle inventories down yet again

Canadian cattle inventories on July 1, 2020, were at 12.2 million head, 0.5 per cent below a year ago and the smallest inventory since 1988. This year’s inventory report is not based on producer survey results but is based on marketing data and modelling. Inventories are down despite production lags and Canada becoming a net importer of feeder cattle. Total inventories were down in all provinces except Saskatchewan and Quebec.

Source: Statistics Canada

The cow herd is shrinking faster than total inventories even as processing disruptions supported feeder and fed cattle numbers. Beef cow inventories were down 1.4 per cent to 3.6 million cows. In the East, cow numbers were up 1.2 per cent with gains spurred by Ontario (+1.0 per cent) and Quebec (+2.3 per cent), while the Atlantic provinces were down (-1.8 per cent). Overall, the West was down 1.7 per cent with declines in Alberta (3.5 per cent), Manitoba (2.9 per cent), and B.C. (0.5 per cent). The exception was Saskatchewan with a modest increase (+0.9 per cent).

Beef breeding heifer numbers are the lowest since 2010, down 0.8 per cent from last year to 630,800 head. The decline was slower this year compared to the previous two years when numbers fell 2.6 per cent and 5.1 per cent in 2018 and 2019, respectively. Retention may have been supported by this year’s moderately improved moisture conditions.

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The number of calves (under one year) was down 0.4 per cent to 3.98 million head, the lowest since the late 1980s. Since 2005, the calf crop has been in steady decline. Smaller calf crops contributed to the tightening of domestic supplies. Offsetting this, Canada became a net importer of feeder cattle from the U.S. in 2019.

U.S. inventories peak and stabilize?

The USDA July 1, 2020 inventory report shows the largest inventory since 2008, with 0.1 per cent growth over last year. Total cattle and calf inventories were up 100,000 head to 103 million head.

The 2020 calf crop is expected to be 0.7 per cent lower than last year at 35.8 million head. The number of feeder heifers (>500 lbs.) was up one per cent at eight million head, remaining the largest feeder heifer inventory since 2007. Feeder steers (>500 lbs.) were up two per cent, or 300,000 head, to 15 million head.

Source: USDA

Beef cow inventories were down 0.8 per cent, the second decline in two years, to 32 million head. Beef replacement heifers were steady after three consecutive years of lower beef replacement heifer inventories. With slaughter heifer numbers up and cow and calf numbers down, it is estimated that inventories would have been one per cent below year-ago levels without the impact of the COVID-19 pandemic. Instead, inventories remain relatively steady and historically large as delayed marketings are expected to spill into 2021. Total U.S. cow slaughter from January through September is down 1.3 per cent from 2019, but remains nine per cent higher than the five-year average. This was possible with dedicated cow plants and has occurred even with large supplies of fed cattle. The improvements in soil moisture could keep cow inventories steady, at least for 2021.

Feeder cattle supplies outside of feedlots are estimated at 37.4 million head, up 300,000 head or 0.8 per cent from last year. According to the August USDA cattle-on-feed report, on-feed slaughter inventory was up two per cent to 11.3 million head, with ample cattle available to place this fall.

Grading

Larger fed cattle carcass weights in the second quarter of 2020 supported production of Prime and AAA beef as production moved higher over the summer. Throughout July and early August 2020, Prime and AAA grades were 70 per cent of all A grades in Canada, up 19 per cent over the five- year average for the same time period. By mid-August, production began to normalize, up seven per cent over same time last year, but just one per cent higher than the five-year average. Year-to-date 2020 (September), Prime and AAA production is 68 per cent of all A grades, up four percentage points over the five-year average.

Despite increased grading quality, Canada still lags behind U.S. grading performance. U.S. Prime and Choice production has averaged 83 per cent January to September 2020, up nearly four percentage points over the same period in 2019. Prime and Choice production are being supported by U.S. steer carcass weights running steadily above year-ago levels. Peak fall weights are expected to near the 930-lb. range, roughly 10 lbs. higher than 2019. It’s key to remember that Canada has a more narrowly defined Prime grade than the U.S., as dark-coloured meat, yellow fat, and older animals are not considered Prime in Canada like they are in the U.S.

Beef exports

January to July 2020 beef exports are down nine per cent in volume and two per cent in value. Exports were affected by supply disruptions and demand shocks in several countries this spring. Total beef exports for 2020 are projected to end the year down 6.5 per cent with volumes supported by production in the second half of the year. Beef has proven to be a staple food in many major export countries and GDP growth in major markets is expected to rebound next year.

Source: OECD

The U.S. remains the major export market for Canadian beef, accounting for a projected 75 per cent of total exports in 2020, up three per cent from last year. Japan was steady with 2019 at 11 per cent of total exports, followed by Hong Kong and Macau (3.3 per cent), Mexico (3.0 per cent), mainland China (2.1 per cent), and Southeast Asia (1.6 per cent). Trends include a decrease in exports to China this year (58 per cent) and an increase in exports to the European Union (+23 per cent).

Cattle prices

Eastern premiums in the fed market

Alberta fed steer prices made a low of $125/cwt in May, but have since traded narrowly between $133-$137/cwt. The third-quarter price at $135/cwt is five per cent lower than 2019 and six per cent lower than the three-year average. Eastern prices rose with Ontario less affected by plant closures this spring. The East has been trading at a premium to the West for most of the year. Third-quarter Ontario fed-steer prices at $142/cwt are up two per cent from 2019 and up three per cent from the three-year average.

Alberta and Saskatchewan cattle-on-feed inventories September 1, 2020, were up eight per cent from last year at 773,000 head. August placements were down two per cent from 2019 and four per cent from the five-year average. Either cow-calf producers are taking advantage of improved grass conditions this year or some risk mitigation is occurring at the feedlot. It is possible that the low August placement number reflects an easing from large numbers in June (+9.0 per cent) and July (+35 per cent).

Elevated carcass weights from May and early June got current in July and August. Steer carcass weights in July and August were steady with 2019, up three per cent over the 10-year average. From January to September steer (904 lbs.), heifer (835 lbs.) and cow (735 lbs.) carcass weights are up two per cent over 2019, while bulls (967 lbs.) are up five per cent.

Cow prices steady on strong demand for 85 per cent trim

From January to September, cow slaughter is down 21 per cent in the West and five per cent in the East. Cow exports are up 33 per cent from January to August, offsetting some of the impact. August was the first month that cow exports were steady with last year. Total cow marketings are down eight per cent from January through August.

Cow prices have been supported by strong demand for 85 per cent trim this year. Alberta D1,2 cows averaged $87/ cwt in the third quarter, down one per cent from 2019 and down five per cent from the three-year average. Ontario D1,2 cows averaged $84/cwt in the third quarter, up five per cent from 2019, and up seven per cent from the three-year average. In eight out of the last 10 years, cow prices have seasonally declined into November. In the last decade, Alberta and Ontario cow prices have dropped eight per cent and 12 per cent, respectively, between September and November. While 85 per cent trim prices in the U.S. are down 7.2 per cent from September 2019, they are steady with the three-year average.

Feed grain prices

Late-season dryness allowed southern areas to get ahead on harvest with empty bins pressuring barley prices this August. The price of barley fell sharply 16 per cent in August to $205/tonne for week ending September 5, two per cent lower than the 10-year average. It is not unusual for feed grain prices to seasonally soften during harvest, but they typically ease into seasonal lows.

What is surprising is the counter seasonal price correction that returned 16 per cent to the price of barley since the September low. Barley prices are on an upward trend at $237/tonne for the week ending October 3. This has been supported by exports, large domestic feed use and fewer imports. Exports for 2020 are projected at three million tonnes steady with 2019, 20 per cent higher than the five- year average. Feed and industrial use at 0.3 million tonnes will be the highest since 2014 and 200 per cent higher than the previous year. Exports and domestic feed use are expected to remain steady into 2021.

Corn prices were also volatile this fall reflecting uncertainty from harvest in the late-maturing crops. A cold, wet spring delayed planting, drought and smoke challenged advancement during the summer, and a quick frost mid-September had few fields ready to take advantage of the warm, dry September. If precipitation is limited this October and November, dry down should be supportive of high yields. Ontario corn prices rallied 20 per cent from the end of July to October 3. For the week ending October 3, Ontario corn is $225/tonne, one per cent lower than last year but 16 per cent higher than the five-year average. A similar rally was seen in 2019, but it occurred earlier, from June to July.

Calf prices supported by low feed costs and black margins… at least for September

Calf prices in September were supported by lower feed costs and live cattle futures supporting positive margins. This black bidding potential in September was surrounded by a sea of red sales, creating urgency in September buying.

Ontario calf prices were trading at a $2/cwt premium to Alberta for the third quarter 2020. In September, Ontario calves were $222/cwt, six per cent higher than 2019 and seven per cent higher than the three-year average. Alberta calf prices were $215/cwt in September, steady with 2019 and the three-year average.

Calf prices should soften into the end of November. While remaining strong in the East, Ontario calf prices are not likely to break the five-year average for November at $219/cwt, as prices have been below the five-year average all year. Alberta prices are likely to stay between five and seven per cent lower than the five-year average for November, which is $224/cwt. However, this softening could be compounded if future margins on the fed market continue to trend in the red.

Cow-calf net returns look to be steady to up slightly this year, with inputs steady and calf prices steady to higher than 2019. This would be the tenth straight year for positive cow-calf net returns.

Replacement ratios

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.

Replacement ratios in 2020 were steady or increasing from Q1 to Q3 in the East and West. From Q1 to Q3, the ratios were steady to eight per cent higher in the East, and 10 to 19 per cent higher in the West.

Replacements ratios in Q3 2020 were steady to up 17 per cent from 2019 for all regions and all quarters and all cattle types. The Q2 yearling steer replacement ratios in the West reached near 2015 highs, but declined five per cent into Q3, to be just eight per cent higher than Q3 2019.

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