The latest Canadian cattle inventory report created a feeding frenzy for feeder cattle and calves. The numbers indicate that Canadian farmers and ranchers are not retaining heifers for breeding and that the beef cow herd declined another 5.1 per cent. This equates to a 17 per cent reduction in beef cow numbers since 2005. When one considers that fed cattle sales into the U. S. for 2010 also increased by 26 per cent, it would appear that buyers will indeed have to bid aggressively for calves.
As with all good news stories, there are many sides to the discussion. The first that comes to mind is the cull cow price and the price of bred cows and pairs. Cull cow prices remain strong and that will ensure that cattle continue to walk to the kill floor. Producers seem anxious to finally enjoy a relatively decent price on cull cows, and packers continue to like to own the commercial beef for their production margins. It appears that liquidation may continue into 2011. Both bred cow and cow-calf pair prices are staggering well behind their value in the current marketplace because producers are not replenishing the herd. This scenario indicates increased tonnage of commercial beef in the slaughter system, which will keep the price of fed cattle under wraps.
The opportunity to hedge or contract cattle in the future at historical highs does allow for some leverage in bidding on feeder cattle and calves. But, the reality is that many buyers do not have a risk-management plan in place and even if the cattle are locked in, the dollar must be also. The price of today is not the price of tomorrow unless it has been bought for tomorrow.
I see terrible mistakes being made in the current market as buyers bid away their margin in the expectation of prices staying the same or improving. The reality is that we do have enough feeder cattle and that the higher dollar has dampened feeder cattle shipments into the U. S. in 2010 by 4.4 per cent.
Feed prices up
Another technicality is that feed barley prices show every indication of increasing. Shortages in other countries and the lack of western Canadian harvest weather are factors, but barley will be forced to ride on the back of wheat and corn. With the margins thin, cattle feeders can ill afford an increase in the cost of gain. Right now, buyers are ignoring the fundamentals and bidding more for cattle in a rising feed cost environment.
This spirit of risk could backfire and although it likely won’t immediately hurt feeder prices, it may put a lid on the upside.
The domestic demand for beef has been a bit of a mystery this year as consumers go into buying sprees and then back off. It is hardly the environment to be taking risk, and packers have been very cautious. The wildly fluctuating dollar and the unpredictable and often counter-seasonal buyer have been margin nightmares.
To control the margins, packers remain committed to bidding on the lower end of the buy. They are not giving us any indication of desperation although supply to the kill floor is the biggest consideration facing the beef industry today. They will continue to buy the beef but only at a price at which they can sell it and at some point the high price faces consumer resistance.
Export demand is a brighter picture and greater China and Southeast Asia are gaining an appreciation for beef in the diet. Both Canada and India have increased sales into these regions, but most have been from the U. S. (33 per cent) Australia (20 per cent) New Zealand (21 per cent), and Brazil (12 per cent). Looking closely at the meat sheet, the beef shipped was mainly for manufacturing and alternative (regional) cuts.
As global markets become more transparent, the Canadian dollar appreciates and Canadian inventories decrease, finding the right pile of sand to play in becomes very important. A reduction in the Canadian beef cow herd is not an industry solution and can only be a long-term advantage to producers if demand through domestic and import markets are maintained or increased, the cost of gain is manageable and risk is managed.
BrendaSchoeppisamarket analystandtheownerandauthor ofBeeflink,anationalbeef-cattle marketnewsletter.
Aprofessionalspeakerandindustry marketandresearchconsultant,she ranchesnearRimbey,Alberta. [email protected]
Therealityisthat wedohaveenough feedercattleandthat thehigherdollarhas dampenedfeedercattle shipmentsintotheU.S. in2010by4.4percent.