Feeder cattle prices have been trending lower over the past month. Poor margins in the finishing feedlot along with slower exports of feeder cattle have set a negative tone. The Canadian dollar is expected to trend higher which will result in lower cash values. COOL has also decreased demand from south of the border, causing more Manitoba feeder cattle to be sold into Alberta feedlots. I’ve had many calls from cow-calf producers in regards to the long-term outlook for feeder cattle. Cow-calf producers are struggling with lower financial returns and many producers are liquidating herds, especially in drier regions of Alberta and Saskatchewan where feed supplies are relatively tight.
According to Statistics Canada, total Canadian beef cows as of July 1 were 4.588 million head, down 5.6 per cent from last year and heifers for beef replacement were down 2.5 per cent. It appears that the number of calves born in 2009 could be down four per cent to eight per cent in comparison to 2008. U.S. beef cow numbers as of July 1 were 32.2 million head, also down one per cent from July 1 of 2008. Heifers for beef cow replacement were down two per cent from last year at 4.5 million head. USDA estimated the 2009 calf crop at 35.6 million head, down one per cent from last year. According to the USDA, the ratio of heifers to steers and heifers on feed is the highest since July of 2004. Similar to Canada, the U.S. does not appear to be holding back enough heifers for herd maintenance and will remain in a contraction phase for 2009 and into 2010
The U.S. economy is in the process of coming out of recession and moving into the expansion phase. Consumer incomes will start to increase next year and export demand is also expected to improve. Cattle prices tend to lag other major commodities by eight to 12 months. People become very frugal during recessions and it takes time for people to change or increase their spending patterns. Therefore, the U.S. cattle cycle has potential to contract further in 2010 and U.S. cow-calf producers will only start to hold back heifers in 2011.
It is important that Canadian producers get a one-year head start on their U.S. counterparts for two reasons. First, when U.S. producers start to hold back heifers, there will be a shortage of feeder cattle coming on the market. The calves from these heifers held back in 2011 will only come on the earliest in 2012. Secondly, looking at past history, when the U.S. economy moves into an expansion phase, this is very bullish for cattle prices. However, as I mentioned earlier, it can take a year before beef and cattle prices start moving in line with the inflationary surge.
I know it can be very difficult to go against the tide but this is a good time to rebuild herds or even expand. The key is to capitalize during the first price rally in feeder cattle which will likely be in 2011 when U.S. producers start holding back on heifers. Our Canadian industry is moving through a modernization phase with age verification and premise ID. This will enhance export demand for feeder cattle and allow producers to take advantage of the higher prices when the market rallies. When you hear of massive liquidation and the panic selling, the lows in the market are likely in place. Given the current attitudes in the cow calf sector, we can’t be far away.
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.