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Feeding Economics For 2010

I’m somewhat optimistic for the feedlot industry for the first half of 2010

Finishing feedlot margins in Western Canada have been hovering in red ink over the past couple months. Lower prices for fed cattle along with a small rally in the feed grains have set a negative tone for the margins structure. Feeder cattle prices appear to be ratcheting higher and many producers are wondering how aggressive they should be at the current levels. It is important to look at the potential margins in the first and second quarter of 2010 when making feeder cattle purchases. In this issue, I will discuss some of the risks for the finishing feedlot for this time frame.

U.S. meat supplies will move through a fundamental shift in 2010 due to lower domestic production. The industry is starting to see the effects of lower feeder cattle placements along with a reduced cow slaughter. For the first six months of 2010, U.S. pork and beef supplies will be down nearly 400 million pounds in comparison to the same time in 2009. Lower domestic production will result in greater import demand. Australian exports to the U.S. have surged in 2009 but modest growth is expected in 2010. However, we are also expecting greater demand for Canadian slaughter cattle and beef products.

Beef demand is also expected to improve. U.S. exports have recovered in the final quarter of 2009 largely due to weakness in the U.S. dollar but the USDA is looking for continued growth in 2010. U.S. per capita beef consumption is expected to drop in 2010 but this is largely due to lower available supplies in the domestic market. Canadian offshore exports are also gaining momentum to Southeast Asia and Russia. Retail prices are expected to recover as supplies decrease and consumer incomes start to trend higher in the second quarter of 2010. In past years, there has been a strong seasonal tendency for the cattle market to decline from April through June. I feel we could be in for a surprise for a counterseasonal trend during this time in 2010.

Inflationary factors will start to influence beef and cattle prices more significantly in the second quarter of 2010. Energy prices are trending higher which will add costs to production of beef and cattle. After the 1983 recession, U.S. GDP soared by eight per cent while unemployment dropped by 2.5 per cent. It wouldn’t surprise me to see this type of economic activity occur again.

The Canadian dollar has been trending higher and will likely continue until the end of the year. However, U.S. interest rates are expected to increase in February and March which will result in the U.S. greenback becoming a higher-yielding currency. The U.S. quantitative easing program is also coming to an end which will cause longer-term interest rates to rise. Canada’s Central Bank rate is typically a discount to the U.S. and this should go back to normal during the spring period. Therefore, the Canadian dollar will stay strong against the greenback into the first quarter of 2010 but we may see the loonie weaken as U.S. interest rates start to increase.

Feed grain prices will continue to be quite volatile over the next six to eight months. U.S. corn production estimates are starting to decline because of the delayed harvest. Secondly, corn will be highly correlated with energy prices even if the U.S. carry-out is over 1.5 billion bushels. In the 2007-08 crop year, corn reached record highs largely due to record-high crude oil prices. Crude oil prices are expected to consolidate in the short term but have potential to move higher later in winter. This will underpin the feed grains complex and pressure feeding margins.

Lower financial returns in the cow-calf sector have resulted in further liquidation in 2009. Cattle herds on both sides of the border will likely remain in a contraction phase through 2010. At this time, U.S. winter wheat and pasture conditions are expected to be quite favourable and feeder cattle supplies are expected to be rather tight in the first three months of 2010. Despite the lower Canadian calf crop and strong Canadian dollar, feeder cattle exports have potential to be quite strong from December through February.

I’m somewhat optimistic for the feedlot industry for the first half of 2010. Higher fed-cattle prices and an expanding North American economy should bode well for finishing feedlots. Based on the past, when the U.S. economy is in an expansion phase, this is the most profitable time for the feedlot sector. After this past fall period, better times are well deserved.

Gerald Klassen analyzes markets in Winnipeg and also maintains an interest in the family feedlot in southern Alberta. For further information, comments or questions, he can be reached at[email protected]or 204-287-8268.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or futures or futures options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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