Hold onto your hat, the roller-coaster that is today’s cattle market is still running downhill.
When it hits bottom is everybody’s guess, but it won’t be for a while yet.
In the meantime the red ink continues to pile up in feedlots, pulling feeder prices down just as the fall run opens for business.
From the February highs, to the week ending September 9, the value of Alberta 550-lb. steer calves dropped 32 per cent, the largest fall in more than 15 years, according to Canfax.
At the same time feedlots are continuing to post horrendous losses, anywhere from $250 to $450 per head by Canfax’s estimation. Early September marked the 14th month of losses for feedlots.
Canfax manager Brian Perillat puts the average loss over those 14 months at $294 per head which has eaten up a fair portion of the average $243 per head profit gained over the previous 21 months when the cattle markets were putting a smile on every face.
The erratic futures market provides little relief. As Steve Kay reports in our October 2016 issue of Canadian Cattlemen, it has been running negative to the cash for much of this year, but no one is sure why it went so negative in August and early September.
Perhaps the traders were put off by the rising tide of protein on the North American market. USDA is forcasting a 3.1 per cent bump in supplies of red meat and poultry production for 2016, which is not that much really.
A similar story is unfolding in Canada with protein production expected to end up four per cent higher than 2015 by year-end. The majority of this increase won’t be consumed in Canada, however, which encouraged Canfax analyst Brenna Grant to speculate that there is room for more protein in the domestic market.
Canadian protein consumption has been sliding in recent years from the high of 181 lbs. in 2001 to a low of 162 in 2014. It bounced back somewhat last year, but still remains about four pounds below the historical average of 169 lbs. per capita.
Cassie Fish, an analyst who watches the U.S. market for Consolidated Beef Producers, sees other reasons for the overblown actions of the futures market.
While allowing that the CME live cattle contract has issues, among them the ever-present impact of the global algorithmic-generated trading, some of the blame can be traced to the shrinking of the negotiated cash price coupled with the expanding cattle supplies in the U.S. today.
As U.S. cattle numbers declined sharply from 2008 to the lowest level in modern history, the number of negotiated cattle dropped from 40 per cent to just 20 per cent in the U.S. Now that cattle numbers have expanded, the remaining cash sellers have to compete harder for bids while the buyers compete less.
The result, she says, is feedlots are now faced with selling an increasing supply to packers who already have a substantial amount of their weekly kill on the books. Whatever leverage they used to gain by remaining current with their marketings has seemingly been eroded. Perhaps that is partially responsible for the anaemic rallies in the futures.
Ontario-based analyst Kevin Grier in his September 6 Canadian Cattle Buyer said the only good news for feeders was that they were well sold when the bottom fell out so they were not pressed to move more than the minimum amount of cattle.
The other bit of good news is that packers are very profitable so they will keep big numbers going through their plants. Eventually the numbers will ease which will also benefit feeders. Getting to that point, however, will be painful.
How low can prices go? That was the subject of a factsheet put out last month by Canfax Research Services that examines some of driving factors in the cattle cycle.
In part the market is reacting to the huge upswing in prices in 2014-15 that was a respone to the unique shortage of proteins in North America. Consequently the downturn of the current cycle is expected to be larger than past cycles, reflecting the false top posted last year.
Within that trend several factors influence the cattle cycle, and thus the price cycle.
Carcass weights, for example, have increased pretty consistently since 1975 at an average seven pounds per year in Canada. Cow and feeder cattle are two other key drivers as they affect domestic supplies.
Beef exports are also factored in, particularly China at the moment, after our shipments plummeted from 1,800 tonnes in January to 32 tonnes in July after stricter inspections were implemented for ractopamine.
The Canadian dollar could be moving down again if the U.S. Federal Reserve raises its rate again.
Finally there are the intangibles — weather and psychological factors such as the unemployment rate, and income levels which affect consumer confidence.
Boil it altogether and Canfax finds that if the market follows the patterns seen in previous cycles, prices may drop before the long-term trend and bottom in two to four years.