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Cattle Numbers Dwindle, But Little Price Response

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Canada’s total cattle inventory fell by 1.3 per cent for the period ending January 01, 2010. The much-anticipated Stats Canada report indicated that cow herds declined in all provinces except Ontario and Saskatchewan. Ontario numbers increase by 2.2 per cent in which there will be a dairy influence as the Canadian dairy herd stabilizes. The increase in the Saskatchewan of 5.7 per cent was influenced by heifers for breeding and additional cattle on feed in the province.

Collectively, cattle numbers in the U. S. and Canada have fallen by one per cent, bringing them to the lowest level in 15 years. It was clearly evident that heifers have been and were again found in the slaughter mix, rather than being retained for breeding. This is one of the most important pieces of the inventory puzzle.

True price stability in feeder cattle and cows is unlikely until heifers are retained for breeding. It is too late to influence 2010 in this regard with the heifers already designated for slaughter, but the second half of the year could be interesting.

At the same time that the Canadian cattle inventory report was released, winter storms had shorted the market of beef in 28 states. This influenced cash and live cattle futures markets, setting a somewhat false tone for the second quarter. We can expect that a clearing in the weather will bring cattle to town for slaughter. In Canada, steers on feed over 1,250 lbs. and heifers on feed over 1,100 lbs. are significant and still have to show up in the daily show list. Almost 50 per cent of the Alberta cattle on feed are heavy and designated for first-half slaughter. With export activity continuing to decline, these short-term cattle will pressure the cash market.

PACKERS UNDER CAPACITY

Looking a little deeper, the total number of cattle on feed is down from this time last year, which raises a concern regarding packer utilization. The real threat in the reduction of the cow herd is to the packing industry, which not only needs to fill hooks but has the stretch to buy fed cattle at a price that is profitable for the feedlot. Slaughter levels in 2009 were already reduced in Canada as demand slackened for both domestic and export beef. The 2009 slaughter was 3.7 per cent below the year previous.

It is hard to justify increased packing capacity when margins are sure to be threatened. That is why we have seen packer and feedlot investment in cow herds and land to ensure vertical integration of feeder and fed cattle.

The exports of feed cattle and feeder calves crashed in 2009 with exports down 31.6 per cent. At the same time, imports of beef from the U. S. increased into Canada. The United States is our biggest consumer of beef and only buyer of live fed cattle.

SHORT OF COWS?

Are we short of cows? Not really. A reduction of 177,000 head of beef cows is not earth-shattering news, it is only three or four days’ kill. But the lack of replacement heifers will come in as support for feeder cattle prices later in the year. Meantime, a little discipline will go a long way. Getting all fired up in anticipation of a better market could spell another year of losses for the industry. Let this market play out for a while and see if there is clear direction. It is folly to bid in cattle at a loss just as it is unwise to continue to hold cattle for more money after they have hit a glass ceiling.

Recouping loss and mitigating risk must be the focus for 2010. We have yet to fully appreciate the demand side of the beef market, which remains fragile.

To support this discussion, one only has to refer to the average fed cattle price in 2009 which was $85.72 cwt., well below the previous three years. Beef as a commodity has lost value. The appreciation of the Canadian dollar is a new reality and markets have adjusted accordingly on feeder cattle, but fed cattle bear the weight of currency. Feed prices, driven by corn, will rise through the spring. And, the U. S. expects to increase exports to Canada, which will further pressure domestic product.

This all boils down into another year of volatility in fed and feeder cattle markets with strong prices on breeding bulls and replacement-type heifers.

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