I was recently in Toronto as part of Canadian Food Summit, an event put on by the Conference Board of Canada to develop a national food strategy. A conference board event is not complete without senior economist Glen Hodgson. He is as popular in the East as he is in the West and we have often hosted him at Prairie agricultural conferences. During his global outlook, Mr. Hodgson used the term “impaired confidence” in reference to the U.S. debt. In other words, there was a slim ray of hope but no sight of the end of the tunnel.
For the cattle industry, we must be aware of the limitations that are imposed on us by global economics. Public debt is huge in most countries, but especially in the U.S., our major trading partner, where it is 80 per cent of GDP. Canada also has a growing public debt that translates into uneven growth in every sector. It is difficult to have a growing economy when folks simply cannot or will not buy.
For many consumers, the tightening of the belt has meant cutting back on food purchases, including protein, in favour of both energy and housing or in some cases entertainment. In the U.S., the division of the food dollar in 2011 was almost equal between sugar, poultry, beef and wine, with sugar being the largest food expenditure. It is an unusual paradox that North Americans cut food purchases at a time in history when food only accounts for seven per cent of expenditures.
As for Canada, one of the wealthiest nations on earth, it would seem contradictory to scrap food for fuel, but so it is. The irony here is that Canadians waste 40 per cent of their food for a value of $27 billion per year, enough to account for the GDP of 32 of the world’s poorest countries.
Uncertainty affects beef
For all, the European recession hangs like a wrecking ball to financial markets and keeps the tension tight at the international level. Commodity markets such as beef are restless and unreliable. The fluctuations are a reflection of the lack of certainty in the future direction of the value of food commodities. The daily see-saw of events makes or breaks traders. These are the same traders who had fled from the equity markets because of instability there. In reality, the weight of financial collapse anywhere in the world has a ripple effect on all markets, including those here at home.
The Canadian dollar also suffers relentless attack whenever there is uncertainty in world financial markets, and that affects our commodity markets, such as beef.
In the current market environment, beef is something of an anomaly, in terms of feeder cattle value. The packing plants are cutting the kill and show tepid interest while the feeder cattle market surges ahead. It is showing confidence that markets will support the buying price of inventory in the future. I would reference this as “impaired confidence.” It is impaired because there is absolutely no current evidence that domestic consumption will improve. The health of the fed cattle market is entirely dependent on interest outside of our domestic markets, particularly in those nations with a growing middle class and that too has some restrictions, particularly for cattle fed ractopamine.
Impaired because the live cattle futures board cannot break out of the hold that it is in (and it is already overbought) and that means that the first half of the year will be under pressure to sustain itself and further appreciation will be highly dependent on global economic health.
And finally, impaired because the domestic consuming public has other interests at this time. They want to keep candy in the cupboard, fuel in the car and a roof over their heads. In short, this is a sellers’ market.
It may seem harsh to look at the current cattle prices in this light. We are finally being paid decent value for feeder cattle. It is true that is unlikely that feeder cattle prices will fall based on the current supply shortage. It is also true that basing buying decisions for feeder cattle outside of the context of the current market will prove to be folly. As Steve Kay of Cattle Buyers Weekly has said: “All our wealth in the cattle business comes from the consumer.” It is that consumer who is walking away from the food counter and running from high-priced beef.
We are at a point where North American consumers will seek protein largely by price and most certainly that is true in the U.S., where buying patterns have dramatically shifted toward ground beef. Fortunately in Canada, consumers still buy a variety of cuts of beef and food service has supported beef on the menu. We are however, closing in on price resistance. At some point Canadian interest in domestic beef may shift and that will have a dramatic impact on beef cattle prices. At this point, losses in the fed cattle industry are expected to range from $90 – $340 per head.
This is the very reason that the current feeder cattle market is impaired by its own confidence. We may not lose any value in feeder cattle but to speculate on tremendous price appreciation is not supported by the fundamentals at this time. There has to be a demand pull that far outstrips supply for that to happen. As of right now, speculating that fed cattle appreciation will erase current buying losses is truly impaired confidence.