Demand continues for U.S. beef
Market Update with Jerry Klassen: American consumers have more disposable income
By Jerry Klassen, Columnist, Grainews (Canada)
January 10, 2020
As of mid-December, Alberta fed cattle were trading in the range of $152 to $155, up approximately $10 to $12 from a month earlier. The February and April live cattle futures continued to trade near contract highs due to the uncertainty in beef production during the first quarter of 2020. It appears that beef production from January through March of 2020 will drop below year-ago levels.
Packing margins remain in healthy territory and packers are processing as many cattle as they can get their hands on. Carcass weights are starting to decline in Alberta and this trend is expected to continue into the spring. Current feeding margins are hovering around breakeven, but profitability is expected to improve. Feeder cattle prices are relatively unchanged from last month.
We’ve seen a year-over-year increase in U.S. feeder cattle imports, which has limited the upside potential for Canadian prices. Weaker feed grain values in Western Canada have contributed to the higher import pace. In central Alberta, medium- to heavier-flesh tan steers weighing just under 850 pounds were quoted at $188 in mid-December; mixed steers averaging 675 pounds were valued at $197 while Black Angus-based, vaccinated steer calves weighing 510 pounds were selling for $234.
From May through August of 2019, U.S. feeder cattle placements under 700 pounds were sharply below a year ago. In Alberta and Saskatchewan, the placements were also marginally lower in the lighter weight categories.
I’m expecting this placement schedule to translate into lower fed cattle supplies during the first quarter of 2020. On subsequent cattle-on-feed reports, the placements in the 800-pound-plus categories have come in above a year ago, but not significantly enough to offset the declines of lighter-weight categories earlier in summer. The USDA is forecasting first-quarter beef production to finish at 6.515 billion pounds, up 100 million from the first quarter of 2018. However, I’m forecasting the production to come in under 6.2 billion pounds. Given the strength in the cash and futures market, the trade appears to be concerned that first-quarter production will be lower than expected.
The U.S. consumer is in a unique situation this year. Average wages are up about 3.2 per cent over a year ago, which is higher than the inflation rate of about two per cent. Given the increase in wages, the average American is in a position to increase savings while continuing to spend. Consumer spending has been a major pillar of the U.S. economy over the past year and this has contributed to stronger beef demand.
The U.S. Federal Reserve has lowered interest rates three times in 2019. There is a very high probability we’ll see significant wage inflation during 2020, which will underpin beef prices. U.S. wholesale beef prices are trading near historical highs. Average ground beef prices in the U.S. are up about 3.4 per cent from last year, but higher-end cuts are similar to year-ago levels. January and February are periods of slower consumption but I’m expecting a very strong fed cattle market during March and April.
Feed grain supply increases ...