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Cattle Inventories Continue To Decline

The January 1, 2009 cattle inventory reports show continued herd reductions in both Canada and the U. S. The liquidation of the North American beef sector has been joined by the U. S. dairy sector in the last quarter of 2008 and first quarter of 2009 as falling milk prices encourage herd reduction.

CANADIAN INVENTORIES

Statistics Canada reported January 1 cattle inventories down 5.1 per cent from last year at 13.18 million head. This is 2.1 per cent below (pre-BSE) 2003 inventories and down 12 per cent from the 2005 peak. Lower inventories were caused by a 6.6 per cent decline in beef cow inventories, resulting from a 30 per cent increase in cow marketings. Increased cow marketings were the result of domestic cow slaughter being up seven per cent from 2007, the highest since 1985, and the first full year of resumption of cow exports to the United States. Beef cow inventories are now 2.1 per cent below 2003 levels and 12 per cent below their 2005 peak. Beef breeding heifer inventories were down 9.7 per cent from last year and are the lowest since 1988. This indicates that producers are continuing to reduce the cow herd due to low to negative profitability and significant market volatility. Smaller cow numbers are expected to decrease the 2009 calf crop, tightening domestic supplies of feeder and fed cattle in the coming year.

Steer inventories (> 1 year of age) were down four per cent with record large feeder exports in 2008 making it the smallest inventory since 1998. Feeder exports have since dropped off, as a result of the cost of gain in Canada decreasing due to lower barley prices bringing Canadian feeding costs more in line with U. S. counterparts. In addition the implementation of country-of-origin labelling (COOL) in the U. S. has reduced U. S. interest for Canadian feeder cattle. Feeder inventories were down 9.7 per cent with the largest decline seen in the heavy weight (-12.5 per cent) and lightweight categories (-10.6 per cent). The number of feeder and calves outside of feedlots is down eight per cent from 2008.

Canadian cattle inventories are projected to continue to decline in 2009, but not at quite as rapid a pace as what was seen in 2008. Cow slaughter is down 12 per cent year to date, with supplies tightening as the glut of older cows has been mostly removed from the national herd. However, continued strong demand for trim product is expected to keep cow prices high and will support slaughter later in the year. In addition heifer placements have decreased from 44 per cent in August 2008 to 35 per cent in February. Indicating that more producers than what the January Inventory report suggest may be retaining them in the new year.

U. S. INVENTORIES

The inventory reductions in the U. S. have been more modest than in Canada, with inventories on January 1st down 1.6 per cent to 94.49 million head. This is the third consecutive year of declining inventories and the smallest number on record (series goes back to 1970). Beef cow numbers were down 2.4 per cent to 31.67 million head. U. S. beef producers slaughtered 12 per cent more beef cows in 2008, as drought and strong cow prices in the face of good trim demand encouraged producers to sell. In addition low milk prices increased dairy cow slaughter by 4.7 per cent. While beef cow slaughter is down eight per cent in the first two months of 2009, dairy cow slaughter is up 11 per cent year to date. Strong cow slaughter along with a two per cent decline in beef breeding heifer numbers to 5.5 million head, point towards lower inventories again in 2009. How much will the U. S. herd contract? Recessionary pressures leading to reduced middle meat consumption and soft beef prices, along with strong demand for trim product that has boosted cow prices will play a major role in what level of liquidation occurs in the U. S. herd. The length and duration of the economic troubles in the U. S. will be a large determinant as to how much and for how long the U. S. herd will contract.

A smaller calf crop and significantly lower on-feed numbers are set to reduce fed cattle supplies in the secwww.

ond half of the year, similar to last year. March 1 U. S. cattle-on-feed numbers were five per cent smaller than year ago at 11.2 million head. Cattle-on-feed numbers are expected to increase through May with larger placements. This delay is expected because of the smaller placements in late 2008 and early 2009 and higher inventories (up 250,000 head) of feeders and calf supplies outside of feedlots on January 1st. Moving into the fall feedlots will have to keep in mind that supplies will be the tightest in recent history.

CULLING RATES AND COW PRICES

Canadian beef cow culling rates were up 3.4 percentage points in 2008 to 15 per cent. This is well above the 15-year average of 10 per cent. Culling rates could be sustained at this level, but with cow slaughter down 12 per cent year to date this is improbable. Cow slaughter is expected to stay at liquidation levels through 2009 and 2010, supported by strong prices, continued market volatility, and low returns for cow-calf producers. Prices reached a high of $52/cwt in July 2007, with prices $7-10/cwt higher in January and February expectations are for cow prices to reach a high of $60/ cwt this summer. There are a few factors that may limit cow prices this summer including a rebound in the U. S. economy decreasing trim demand, potentially larger non-NAFTA imports and a dairy bailout in the U. S. which would increase cow slaughter. An increase in trim supplies or decrease in demand would prevent cow prices from reaching projected highs. After two years of negative returns producers are looking for better prices prior to making decisions regarding the retention of heifers and cows.

DISPOSAL RATIOS

The female-to-male disposal ratio, which is an indicator of female slaughter, reached 1.17 in 2008 up from 1.02 in 2007 and just below the 1985 record of 1.2. The 15-year average of 0.99 implies a stable herd while ratios below indicate retention of breeding females while ratios above 1.00 indicate females are being removed from the herd. On a monthly basis the ratio has fallen from last year’s high of 1.43 in April 2008 to 1.26 in January 2009 (compared to 1.32 in January 2008). While cow slaughter is down heifer slaughter continues to be strong in 2009, with year to date numbers 10 per cent above 2008 due to large placements in 2008. At the same time lower heifer placements in the first part of 2009 point towards lower disposal ratios in late 2009.

BEEF PRODUCTION STEADY

Canadian beef production has been steady around 1.63 million tonnes for the last four years. Larger cow slaughter and steady carcass weights have kept beef production steady despite smaller fed cattle slaughter. Fed production has been steadily declining from 85 per cent of total production in 2005 to 78 per cent in 2008. While cow slaughter remains high, beef production will be sustained at steady to slightly lower levels. However once inventories start to level off and cow slaughter abates, beef production will be significantly lower; limiting future domestic slaughter and beef supplies.

FED PRICES

Alberta fed steer prices increased steadily from January lows to peak in August 2008 at $97/cwt before struggling through November and declining to $93/cwt in March. While this was up $8 from March 2008 lows it is $4 lower than 2007 prices for the same month. Weak consumer

demand throughout the fall prevented the price advances that would have otherwise been expected with tighter cattle supplies. Supplies were also larger than expected, with producer adjusting their inventories to target the premiums in the fourth quarter futures, which also limited price increases.

Ontario saw prices increase from January through August to $97/cwt. Prices then fell through October to $92/cwt before tight supplies and renewed interest from U. S. packers pushed prices up to $100/cwt in January and $99/cwt in March. This is $16/cwt above last March lows and $5/cwt below 2007 prices for the same month. Fed cattle prices went from $2.50 under Alberta prices last March to $6 over in 2009.

Cattle-on-feed numbers are expected to be their tightest in March through late April before increasing into the summer. This is expected to support a spring price rally before pressuring prices down seasonally into the summer. Retail and foodservice are uncertain on what consumers will buy as trends continue to change in the current recessionary period. Inventory patterns are reflecting this uncertainty in boxed beef procurement. Supplies of Choice product in the U. S. reached a high of 63 per cent as of February 28th, which is pressuring Choice prices down and making product more attractive to consumers.

FED STEER PRICES AND CUTOUT VALUES

Relating fed cattle prices to the cutout value provides information regarding packer margin and supply-demand dynamics. Historically the fed steer cutout ratio ranged between 48 per cent and 56 per cent. At times of tight supplies and strong demand it has risen to above 55 per cent and at times of large fed cattle supplies it has dropped below 50 per cent. Between August 2007 and November 2008 the range was narrower, from 52.6 per cent to 56 per cent, indicating that fed cattle prices were high relative to cutout values. This represents the longest sustained period above 52 per cent on record (which started in 1999). The ratio has trended down since August 2008 and was 50 per cent in February implying fed prices should increase going into the spring in light of reduced supplies. However, the spring price rally may be limited by uncertain consumer demand and country-of-origin labelling.

REPLACEMENT PRICE RATIOS

Replacement price ratios have moved lower since third quarter 2007 to reach 1.05:1 in the fourth quarter in 2008 for western Canada yearling steers. While above the record low of 0.91:1 from first quarter 1996 this is well below the historic average of 1.20:1 and represents a weak feeder price compared to fed cattle prices. Yearling heifers had the lowest ratio in the fourth quarter 2008 at 0.96:1 in the west and 0.97:1 in the east. Steer calves had the largest ratio at 1.14:1 in the west and 1.12:1 in the east. Moving into 2009 the first quarter is showing yearling heifers up to 1.06:1 in the west and 1.02:1 in the east. Steer calf ratios have increased even further to 1.15:1 in the west and 1.27:1 in the east. Low ratios like those seen in 1996 are typically followed by positive margins.

demand throughout the fall prevented the price advances that would have otherwise been expected with tighter cattle supplies. Supplies were also larger than expected, with producer adjusting their inventories to target the premiums in the fourth quarter futures, which also limited price increases.

Ontario saw prices increase from January through August to $97/cwt. Prices then fell through October to $92/cwt before tight supplies and renewed interest from U. S. packers pushed prices up to $100/cwt in January and $99/cwt in March. This is $16/cwt above last March lows and $5/cwt below 2007 prices for the same month. Fed cattle prices went from $2.50 under Alberta prices last March to $6 over in 2009.

Cattle-on-feed numbers are expected to be their tightest in March through late April before increasing into the summer. This is expected to support a spring price rally before pressuring prices down seasonally into the summer. Retail and foodservice are uncertain on what consumers will buy as trends continue to change in the current recessionary period. Inventory patterns are reflecting this uncertainty in boxed beef procurement. Supplies of Choice product in the U. S. reached a high of 63 per cent as of February 28th, which is pressuring Choice prices down and making product more attractive to consumers.

FED STEER PRICES AND CUTOUT VALUES

Relating fed cattle prices to the cutout value provides information regarding packer margin and supply-demand dynamics. Historically the fed steer cutout ratio ranged between 48 per cent and 56 per cent. At times of tight supplies and strong demand it has risen to above 55 per cent and at times of large fed cattle supplies it has dropped below 50 per cent. Between August 2007 and November 2008 the range was narrower, from 52.6 per cent to 56 per cent, indicating that fed cattle prices were high relative to cutout values. This represents the longest sustained period above 52 per cent on record (which started in 1999). The ratio has trended down since August 2008 and was 50 per cent in February implying fed prices should increase going into the spring in light of reduced supplies. However, the spring price rally may be limited by uncertain consumer demand and country-of-origin labelling.

REPLACEMENT PRICE RATIOS

Replacement price ratios have moved lower since third quarter 2007 to reach 1.05:1 in the fourth quarter in 2008 for western Canada yearling steers. While above the record low of 0.91:1 from first quarter 1996 this is well below the historic average of 1.20:1 and represents a weak feeder price compared to fed cattle prices. Yearling heifers had the lowest ratio in the fourth quarter 2008 at 0.96:1 in the west and 0.97:1 in the east. Steer calves had the largest ratio at 1.14:1 in the west and 1.12:1 in the east. Moving into 2009 the first quarter is showing yearling heifers up to 1.06:1 in the west and 1.02:1 in the east. Steer calf ratios have increased even further to 1.15:1 in the west and 1.27:1 in the east. Low ratios like those seen in 1996 are typically followed by positive margins.

Feeder Prices

Feeder prices fell from August highs to December lows with the fall run before rebounding in the new year. Alberta 850-lb. feeder prices averaged $98/cwt in March, up $15 from 2008 lows and $2 below 2007. Prices have been supported by cheaper costs of gain and strong interest in grass cattle in the beginning of the year. Ontario 850-lb. feeder prices averaged $103/cwt in March, up $16 from 2008 lows but down $3 from 2007. Prices have been supported by higher fed cattle prices, tight local supplies, and a lower cost of gain in Canada due to a weaker dollar and feed grain prices.

Barley prices have been falling since peaking last July. In March Lethbridge barley was $163/tonne ($3.54/bu.), while Omaha corn was $197/tonne ($5/bu.). This puts barley prices back to levels similar to 2002. The lower cost of gain in Canada should increase feeder prices in coming months, as long as corn prices do not increase dramatically as a result of low spring acreage expectations and higher ethanol production expectations. Corn used for ethanol is expected to increase to 33 per cent of production in 2009 from 30 per cent in 2008. Higher fertilizer prices last fall combined with lower corn prices have prospective corn acres down one million acres from last year to 85 million acres. However, there is still time for producers to change their minds from the February survey. This combination of events will keep competition for acres strong in the coming year.

Feeder Prices

Feeder prices fell from August highs to December lows with the fall run before rebounding in the new year. Alberta 850-lb. feeder prices averaged $98/cwt in March, up $15 from 2008 lows and $2 below 2007. Prices have been supported by cheaper costs of gain and strong interest in grass cattle in the beginning of the year. Ontario 850-lb. feeder prices averaged $103/cwt in March, up $16 from 2008 lows but down $3 from 2007. Prices have been supported by higher fed cattle prices, tight local supplies, and a lower cost of gain in Canada due to a weaker dollar and feed grain prices.

Barley prices have been falling since peaking last July. In March Lethbridge barley was $163/tonne ($3.54/bu.), while Omaha corn was $197/tonne ($5/bu.). This puts barley prices back to levels similar to 2002. The lower cost of gain in Canada should increase feeder prices in coming months, as long as corn prices do not increase dramatically as a result of low spring acreage expectations and higher ethanol production expectations. Corn used for ethanol is expected to increase to 33 per cent of production in 2009 from 30 per cent in 2008. Higher fertilizer prices last fall combined with lower corn prices have prospective corn acres down one million acres from last year to 85 million acres. However, there is still time for producers to change their minds from the February survey. This combination of events will keep competition for acres strong in the coming year.

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