How Lower Inventory Might Affect Cattle Prices

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The inventory shortage, real or perceived, will ignite much-deserved and long overdue increased prices favourable to the cow calf industry.

The talk and the action in the feeder cattle market has centred around the projected loss of inventory in the Canadian beef herd. Analysts were calling for the disappearance of nearly 1 million head of beef cows in 2008. The January Stats Canada report which was recently released put all the speculation to rest. Despite the fact that beef cow numbers have decreased, it was not nearly as huge a drop as some were anticipating. Rather, the 6.6 per cent reduction represents 400,000 head of beef cows. The total inventory drop of 5.1 per cent for all cattle and calves represents 515,000 head. Although the July inventory report is more accurate, the speculation early in the trading year had driven feeder cattle prices based on the supposed 1M head shortage and continuation of liberalized trade. The question now is whether feeder cattle prices can hold or improve.

With the recent announcement that the final ruling of COOL will be initiated on March 16, as originally planned, it looks as though feeder and fed cattle will continue to flow south. Inventory requirements in the U. S. are as critical as in Canada. In regards to beef cow inventory, the United States herd is back down to a size recorded in the 1960s. Feedlot capacity is being utilized at a rate just shy of 60 per cent and beef production from fed cattle is projected to decline. Packers have closed, downsized and consolidated at a staggering pace in the U. S. in the past five years. Last month, U. S. cattle feeders were suggesting the cow-calf industry would need to “give up” some of its profits, but that is unlikely.

To ease the shortage, U. S. feeder cattle buyers will seek cattle from Mexico and Canada. The majority of Canadian cattle will flow through Saskatchewan, to fill American feedlot pens and kill hooks. In 2008, U. S. buyers were able to accomplish this with an average basis of (C$17.00) cwt. on Canadian feeder cattle. Feeder cattle exports to the U. S. from the provinces, largely Saskatchewan, Manitoba and British Columbia will continue as long as the export and currency environment allows for it.

Feeders will want supply

With a cost of gain on steer calves of $140 per head lower than last year, Canadian feedlots will also have a deep interest in securing supply. Some are already lining up fall inventory. Pens need to be filled and more importantly, the kill line needs carcasses. It all sounds good but does it mean that calf prices will increase and stay there? A shortage of supply does not always mean a shortage of beef. As cost of gain decreases, cattle are historically held to heavier weights, thus producing more beef. As well, a shortage of supply only enhances prices for the long term if there is a continued or increased demand. There has not been enough demand to support beef value, which has declined for the past three years. Canada has been slow to get its mind around the importance of a demand pull and the recent developments in trade may be too little too late to make a significant difference in the current economic environment.

As consumer buying habits change, so does the demand for beef. Demographic shifts also contribute to consumer spending with domestic consumption leaning towards poultry for cultural reasons.

Let’s be honest here. The inventory numbers are mirror images of January 2003. During the immediate post-BSE period, cows were kept on farms and export activity was interrupted, resulting in an accumulation of older females. The so-called dramatic drop in inventory is a correction to pre-BSE levels. We can then expect in this environment to have calf prices and commercial beef (cull cow) prices reflect that time for 2009. The current regulatory environment in Alberta and the delivery basis makes it easier for cow-calf producers from other provinces to ship feeder cattle south (or east) and many will continue to do so. The utilization of capacity in the feedlot and the packing house is frail. An interruption in supply may be damaging enough to eradicate players in both of those industries. The damage to the rural fabric in Canada through 2009 may be far greater than the short price rally caused by a shortage of feeder cattle.

One might argue that this “never really happens” in the cattle industry, as despite horrendous challenges, it most certainly has not played out in recent history, even directly post BSE. And, to be fair, the replacement heifers are missing as their numbers have dissolved by 9.7 per cent and have declined since 2003 by 111,000 head. This will have a positive impact in 2010. The difference this time, in addition to over-capacity, is Canada’s lack of alternate export markets to the U. S., the continued decline in the value of beef, a new regulatory environment from province to province, a shift in consumer spending and preference, and most importantly – access to credit.

The inventory shortage, real or perceived, will ignite much-deserved and long overdue increased prices favourable to the cow-calf industry. The other side of the inventory shortage is the reality that until the value of beef increases, trade issues are finalized, commodity markets stabilize and some of the credit issues are resolved, the upside potential of those feeder cattle bids may be limited.

Brenda Schoepp is a market analyst and the owner and author of BEEFLINK, a national beef cattle market newsletter. A professional speaker and industry market and

research consultant, she ranches near Rimbey, Alberta.

[email protected]

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