At this time last year, feeder cattle prices were struggling under the yoke of sluggish fed cattle prices and pressure on all commodities. A six-and-a-half-weight steer traded from $90-$105 cwt. with heifers trailing at $81-$94. The dollar had already gained momentum.
Feeder cattle pricing acted independent of the swings in the value of the Canadian dollar in 2010 and are showing every indication of doing the same in 2011. That is evident in early first quarter trading with the dollar at par and the same 650-lb. steer trading in a range from $114 to $134 cwt. with heifers selling $108-$125 cwt.
Early in the year, cattle buying was fuelled by the rumours of shortages in feeder cattle. Numbers could have tightened but the lack of Canadian feeder exports to the U.S. kept the cattle on home soil. Prices reflected brisk local trade by July and picked up momentum in the last half of the year. The shortage of feeder cattle never really did materialize as heifers continued to be sent to feedlot pens.
It remains true that you will run out of money before you run out of cattle. As feeder cattle prices increase, grass and feeding margins tend to decrease. The hype around the current shortage of North American inventory is raising expectations. Currently, American fed cattle need $120 cwt. to break even. The rally in fed and feeder cattle has not been driven by domestic demand, which continues to be lacking. The poor performance of the American dollar makes for good trade and an increase in interest in American beef is certain to continue. The projected increase in exports from the U.S. is pegged at eight to 10 per cent. This is significant when imports into the States also decline. Australia is a major beef exporter into the U.S. and imports were down in 2010. Further disruptions in trade due to weather will brace domestic prices. A decrease of cattle and beef, particularly cows, from Canada is also going to keep futures prices steamy.
Will feeders hold?
As we go into the next trading year, producers have but one question: Will feeder prices hold? One can project with some certainty that the Canadian dollar will hold at par or slightly higher and that American interest in Canadian beef will be there despite the strong Canadian currency. Feeder cattle shipments into the U.S. will continue to be spotty. Now that the feeder cattle market has gathered some heat south of the border, that is likely to keep the floor on Canadian pricing. Feedlots in Western Canada will continue to pay based on their cost-of-gain advantage. While corn-fed cattle in the U.S. need that $120 cwt., barley-fed cattle in the West can still close under $100 cwt., giving Canadian cattle feeders a competitive advantage in feeding and on the hedge.
In the West, cattle placed on feed and cattle already on feed are at higher levels than the same period in 2009. This means that there will be ample supply of fed cattle in the first half of the year. Packers will likely take advantage and slow the line to back the cattle up. There will be frustration for cattle feeders and that may carry over into feeder cattle pricing.
The saving grace in this scenario could be the shortage of cows for the rail. Packers have successfully used commercial beef to fill hooks and keep margins in the black but they are short on cows. When the absence of cull cows and the retention of heifers are combined, it is at that point that there is technically a lack of supply driven by a shortage of inventory. Neither American nor Canadian cattlemen have begun to retain heifers, thus delaying the real potential in the marketplace.
By all counts, immediate needs for slaughter supply in Canada and the U.S. will be abundant in the first half of the year and we can expect some bumps. Corn is at the verge of driving the American cattle feeder so deeply in the red that they may be forced to bid down feeder cattle prices unless he can hedge. In Canada, it will be about packing and our ability to move the cattle and the beef. Barring unforeseen disaster or disease, a relatively seamless first half of the year will set the tone for a solid footing on 2011 calf prices.
BrendaSchoeppisamarketanalystandtheownerandauthorofBeeflink,anationalbeefcattlemarketnewsletter.Aprofessionalspeakerandindustrymarketandresearchconsultant,sheranchesnearRimbey,Alberta. [email protected]
Thehypearound thecurrentshortage ofNorthAmerican inventoryisraising expectations.