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Beef Watch May 2011

Canadian Inventories

Total beef cow inventories were down 2.7 per cent or 118,000 head to 4.27 million head to be the lowest since 1995. Despite significantly improved pasture conditions this summer, beef cow numbers were down in all provinces. Cow marketings were encouraged by strong cow prices which reached summer highs of $60/cwt. While producers continue to liquidate the herd, it is occurring at a slower rate than what was seen two years ago.

Beef cows in British Columbia were down 2.5 per cent to 192,000 head, the smallest on record since the start of the series in 1976. Alberta beef cow numbers declined 2.6 per cent to 1.68 million head, the smallest since 1994. Saskatchewan beef cow numbers were down 1.5 per cent to 1.3 million head, the smallest since 2002. Manitoba saw the largest decline in beef cow numbers, down six per cent to 503,000 head the smallest since 1996. Ontario beef cows were down 3.6 per cent to 321,000 head the smallest on record. Quebec beef cow numbers at 220,000 head are down 2.2 per cent and have returned to 2003 levels. Alberta’s beef cow herd represents 39.4 per cent of the national herd, followed by Saskatchewan with 30.4 per cent, Manitoba with 11.8 per cent, Ontario with 7.5 per cent, Quebec with five per cent, and B.C. with 4.5 per cent. The average herd size in Canada grew from 1996 to 2007, but has declined since then from 133 head to 129 head per operation.

The surprise in the inventory numbers was the number of beef heifers retained for breeding at 531,600 head, which was up 2.9 per cent from its extremely low level in 2010 at 532,000 head. This is the number of heifers producers expect to calve in the spring and the increase, albeit small, is encouraging to see as breeding decisions would have been made well before the higher prices seen last fall. Producers are beginning to look at low inventory levels and improved prices and decisions around retention and/or purchase of heifers are becoming more top of mind for many. At the same time current bred heifer inventories are the lowest in 20 years and would have to increase substantially, in conjunction with reduced cow marketings, before any increase in cow inventories becomes a reality. Whether producers, after successive years of losses and greater volatility, are ready to expand remains to be seen. There is still the option that heifers currently being back-grounded will be bred this summer. It is important to note that any increase in heifer replacements will reduce fed cattle supplies and beef production over the short term providing further strength to cattle prices.

Dairy cow numbers were up 0.6 per cent at 987,000 head after being up 0.3 per cent last year. The last time dairy cows increased was 1994-95 with 1982 and 1961 being the only other two years of increases recorded since 1960.

The percentage of cows born prior to 1999 has decreased from 12.6 per cent in 2009 to 9.1 per cent in 2010 and 8.7 per cent in 2011 or 457,400 head. The majority of these are beef cows with only 14,000 head or 1.4 per cent of dairy cows being born prior to 1999 as of January 1. The percentage of beef cows born prior to 1999 has decreased from 14.5 per cent in 2009 to 10.7 per cent in 2010 and 10.4 per cent in 2011 or 443,400 head.

The inventory of calves under one year of age was down 5.2 per cent or 222,900 head to 4.07 million head. The number of steers (>1 year) also declined 5.3 per cent to 1.08 million head with heifers for slaughter down 5.3 per cent. Supplies of beef feeders and calves outside of feedlots are down 7.4 per cent or 321,000 head at 4.01 million head, this is just under 2001 when only 4.07 million head were outside of feedlots.

U.S. CATTLE INVENTORY

U.S. cattle inventory numbers decreased as of January 1, 2011, with total cattle and calves down 1.4 per cent at 92.58 million head, the smallest since 1958. This is the fourth consecutive year of declining inventories in the U.S. Beef cows were down 1.6 per cent or 500,000 head at 30.86 million head, while dairy cow numbers were actually up one per cent at 9.15 million head.

The U.S. calf crop at 35.7 million head is down one per cent from 2009 and is the smallest since 1950 when it was 34.9 million head. Beef replacement heifers were down five per cent indicating producers were not looking to expand any time soon. The smaller calf crop combined with aggressive placements into feedlots last fall because of poor winter wheat pasture conditions reduced the number of feeders and calves outside of feedlots to 26.7 million head, which is down 3.4 per cent from last year. Larger placements of lighter-weight calves have increased U.S. cattle on feed numbers as of March 1 to be five per cent above year ago levels.

When Canada and U.S. inventories are combined, it shows the North American cattle herd down 1.6 per cent at 105 million head, with the Canadian herd representing 12 per cent of the total. Canada’s share of the North American herd has fallen from a high of 13.6 per cent in 2005 back to 2000’s percentage. North American inventories are down 5.4 per cent or 5.95 million head from the peak of 110.99 million head in 2006.

CATTLE PRICES

Fed cattle prices have averaged $105/cwt in the first quarter, $23/cwt high than 2010. Fed cattle prices have moved higher on tight supplies in North America with an inventory gap between yearlings and calves coming to market as winter storms have impacted calf performance. In addition lighter carcass weights and reduced slaughter days at packing plants has reduced beef supplies and supported boxed beef prices, which have increased $25/cwt from January to March. Strong export demand for North American beef and pork has also been noted as a supportive factor in the fed cattle market.

Alberta fed cattle prices averaged $109.53/cwt in March. While Canadian fed cattle prices have been at these levels before it was when the Canadian dollar was at US$0.67 not US$1.02. When looking at fed cattle prices in U.S. dollars record highs are being made this spring with an average of $116/cwt in March.

Alberta 550-pound calf prices averaged $149/cwt in the first quarter, $36/cwt higher than 2010. This is the highest first quarter average since 2001. With cattle prices moving up, renewed optimism has many asking if the cattle industry will enter an expansion phase in 2011.

BEEF COW CULLING RATES

Canadian marketings have also been encouraged by the strong cow prices, which reached a high of $60/cwt live last summer with an annual averaged of $54.50/cwt. Alberta D1,2 cow prices have averaged $20/cwt higher than 2010 in the first quarter at $68/cwt and are following the trend established in 2001 when the annual average was $64/cwt with a summer peak just over $80/cwt. Higher prices are encouraging producers to bring older culls to town. However the question remains as to whether they are replacing those older cows with new genetics.

The beef cow culling rate was down to 11.8 per cent in 2010 from 12.8 per cent in 2009. While still above the long-term average of 10 per cent, which would imply further contraction, smaller marketings in 2011 could easily put beef culling rates under the 10 per cent mark. In the first quarter of 2011, cow slaughter is down 16 per cent and cow exports are down 39 per cent. This means marketings are 21 per cent below 2010 levels and 19 per cent below the 20 year average. While cow marketings provide a good indication of herd reduction, it is only half the story. Understanding the number of heifers being retained as replacements is important for determining if inventory reduction is actually taking place. A herd can expand with large cow marketings as long, as heifer retention is higher and more than offsets cow marketings.

Heifer marketings (domestic slaughter plus live exports) in 2010 were up five per cent, as a result of larger overall fed supplies caused by the 55 per cent reduction in feeder exports in 2009. The heifer-to-steer slaughter ratio dropped modestly from 0.74 in 2009 to 0.73 in 2010. This is still well above the 15-year average of 66 per cent, indicating most producers were not retaining heifers in 2010, but this is down from the high reached in 2008 of 0.77 and points towards a slower reduction. Large heifer slaughter over the last two years means that there will be limited supplies of heifers to breed and consequently limiting any growth over the next two years. The big question in 2011 is what will happen with heifer retention? If the current trend in cow marketings sticks throughout 2011 and they are down 20 per cent to 637,800 head, heifer retention has to increase by 20 per cent or 106,200 head to keep the national herd steady. If cow marketings are down 30 per cent to 558,000 head, heifer retention only has to increase by five per cent or 26,400 head to keep the herd steady. Heifer slaughter is only down a modest five per cent in this first quarter of 2011 as yearlings placed in August and September had not yet seen the dramatic increase in prices that calves did in November and December. Heifer slaughter is expected to decline as the year progresses and fewer calves were placed.

The Cattle Cycle

A typical cattle cycle runs 10 to 12 years as the industry responds to market signals. However when market signals are mixed, highly uncertain, or when outside forces such as trade barriers or drought occur the cattle cycle may be delayed or even reversed for a period of time. Also since the cattle cycle focuses on the supply side, consumer demand, which is the other side of the equation, can also influence things. Therefore in years when the cycle is not apparent it is not that it is not there but that outside forces are temporarily limiting or having a larger influence on producer decisions.

What have previous turning points in the cattle cycle shown us? The cycle of the 1970s was driven by soaring domestic demand with increasing per capita disposable income. The cycle of the 1980s was stagnated with the recession and high interest rates in the first half of the decade resulting in a slow sell off of the national herd. A jump in calf prices in the fourth quarter of 1987 (up 16 per cent) kicked off a decade of expansion driven by a low Canadian dollar and growing beef and live cattle exports. This growth phase lasted until 1996. Despite calf prices increasing 31 per cent from Q4 1996 to Q4 1999 inventories declined. Growth did not resume until 2000 after prices had increased another 10 per cent. So what prevented growth from 1996 to 1999? Feed grain prices increased 42 per cent in 1995 and over the next five years averaged 46 per cent higher than the previous five years. Therefore, it took four years for the higher feed grain prices before calf prices increased enough to offset this and encourage further expansion of the national herd.

So where are we in the cattle cycle? Similar to the 1990s feed grain prices have averaged 21 per cent higher in the last five years compared to the first five years of this decade. At the same time Q4 calf prices were 10 per cent lower. In 2010, fourth-quarter calf prices at $110/cwt were only four per cent higher than the 2000-05 average. This implies that calf prices last fall were not high enough to offset the increase in feed costs seen over the last ten years. Not to mention a par Canadian dollar compared to a $0.67 dollar in 2000 and crude oil at US$100/barrel versus US$27/ barrel in 2000. In order to adjust for feed grain prices alone would require prices this fall to be 15 per cent higher at around $130/cwt. In the first quarter 550-pound steer prices have average $148/cwt in Alberta. So while liquidation has slowed, prices will need to hold steady at current levels to send a strong enough signal to producers to expand.

The last cattle cycle ran from 1996 to 2005 (peak to peak) with four years of liquidation from 1996 to 1999 followed by six years of expansion from 2000 to 2005. The current cattle cycle is expected run from 2005 to 2015 approximately. With five years of liquidation 2005 to 2010 followed by one year of consolidation or stabilization of the cow herd in 2011 before entering four years of expansion. Feeder prices tend to lag compared to fed prices, with peak prices potentially being two years after inventories peak (2014-17). Therefore a heifer having her first calf in 2011 will have calves through the highest price years of the current cattle cycle.

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

Heifer Slaughter Ratio

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The Statistics Canada January 1 2011 inventory numbers showed that the Canadian cattle herd declined by 3.4 per cent or 445,000 head to 12.46 million head. There were a number of revisions to historical data which makes the year over year per cent changes misleading.

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