Alberta fed cattle prices have been hovering in the range of $143 to $148 throughout the summer period. The market has been relatively stable without any major changes to supply and demand. Looking forward, beef production is expected to increase during September and October. At the same time, demand moves through a seasonal low. It’s important that finishing feedlots and cow-calf producers have a good idea of the fundamental outlook for the fall period.
The beef market is very unique. Beef demand is considered inelastic; therefore, a small change in supply can have a large effect on the price. Therefore, I thought this would be a good time to discuss a few risks.
The U.S. and world economies are vulnerable to a contraction. As a general rule of thumb, a one per cent increase in consumer spending equates to a one per cent increase in beef demand. If the U.S. consumer pulls in the reins on spending, the beef and cattle markets are very vulnerable to downside risk. The cattle market is very sensitive to changes in disposable income of the average American consumer. The price of substitutes has little effect on the cattle market. Beef is for the higher-income consumer; always has been, always will be.
To start, I want to draw attention to the U.S. beef supply situation. During March and April, the USDA cattle-on-feed reports had placements sharply higher than year-ago levels in the mid-weight categories. This will result in a sharp year-over-year increase in the market-ready supplies during September and October. During September, the U.S. weekly slaughter is expected to average 660,000 head per week; however, during October, the U.S. slaughter is projected to be as high as 700,000 head per week. This is a fairly significant month-over-month increase in production. When supplies increase, prices usually decrease.
I’m concerned about the demand for September and October. Restaurant spending during September is typically down 10 per cent from August. U.S. consumer spending at restaurants stays at the lower levels until late November and December when packers start buying for the holiday season. This year, the slowdown in consumer spending could be more defined than past years.
I’ve included a chart of U.S. Consumer Confidence (see below). Consumer confidence is a measure providing an indication on future household spending and the general overview of the consumer’s financial situation. A value over 100 suggests that consumers are less prone to save and more likely to spend money on major purchases over the next 12 months. Values below 100 indicate a pessimistic attitude on the economy and suggest that consumers will rein in spending.
The chart indicates that U.S. consumer confidence has been hovering above the 100 level since January 2015. The consumer has experienced four years of low savings and above-normal spending. At some point, the consumer starts to rein in spending. Despite lower mortgage rates, U.S. housing starts are also easing and this is considered a leading indicator of the economy. U.S. housing starts were down 3.9 per cent in the first half of 2019 compared to last year.
In the U.S., longer-term bond yields are below short-term interest rates. This is viewed as an inverted yield curve which has preceded all previous recessions. Furthermore, negative bond yields are now common in Europe and Japan which is not a good signal. All stock market crashes have occurred in September and October. I’m not saying we’re going to have a major meltdown but there are many economic indicators that suggest the world economy is vulnerable.
At the time of writing this article, western Canadian yearling prices reached 52-week highs. Calf prices were also relatively strong. We’re heading into a period where beef supplies increase and beef demand moves through a seasonal low. This downdraft in the market could be more defined if the U.S. and world economies move into contraction. Cattle producers need to be prudent risk managers given the current economic environment.