Beef's future: Low numbers, high prices, and a 'challenge' to find calves to feed in your lot

Thursday, January 15, 2015

by BETTER FARMING STAFF

A Canadian livestock industry market analyst describes 2014 as “astounding” for the North America’s cattle industry, and predicts the year’s features of low supply and high retail prices will continue to characterize the industry in 2015.

Even as prices for cattle rose, continent wide cow slaughter collapsed 18 per cent; heifer slaughter dropped dramatically, and the industry faced its shortest cow supplies in about 60 years, Kevin Grier told delegates to the Ontario Cattle Feeders Association’s annual conference last week.

He wonders why the industry hasn’t expanded, particularly in the United States where cow calf croppers have shown profitability prior to 2014 and 2015. Canadian cow calf producers have not been profitable for nearly as long, he notes, although the outlook in 2014 looked very good.

He suggests a number of factors may have been at play to keep cow calf production down, such as drought, previously high feed costs, aging cow calf producers, and the opportunity costs of doing something else. “Those kind of things are at play in Canada as well.”

However, he predicts expansion will occur in the U.S. cattle inventory, beginning modestly this year then gradually at a rate of one to two per cent in following years. That trend won’t extend to Canada, he says, predicting the next national inventory report, to be released in February, will indicate a decline citing the continued increase in Canada’s heifer slaughter numbers as one of the reasons why.

He notes the president of Tyson Foods Inc. has predicted the industry won’t see 2013 slaughter numbers again until the end of the decade.

Ontario finishers could be challenged to find animals to finish because supplies are declining in Ontario and Quebec, and there is now a significant volume of animals shipped from the Prairies to the U.S. Midwest for finishing.

That challenge to obtain supply will have an impact on basis — the difference in price between the U.S. price and a local price, in this case the price an Ontario finisher receives. Grier notes there are three main factors which shape the basis — transport costs, local demand and supply (such as feeder cattle).

He says that basis was weak in Ontario in 2014 but would have been worse had it not been for the growth of the Ontario Corn Fed Beef program. He estimates the program adds $50 a head to the basis because it essentially takes beef off the commodity market and the very nature of the program means it cannot be replaced by U.S. imports, effectively putting “a shield up, which is beneficial to the basis.”

Grier points out beef consumer prices are expected to continue their upward trend in 2015. “Nobody feels sorry for retailers, but the reality of it is that their margins have been squeezed on beef, because cattle and beef have gone up so much more than what they’ve been able to push it up.”

But because less beef will be available in 2015 and its price higher, “we have to be cautious about that demand level and how far demand can support the price of beef,” he says. He notes producers can expect to face competition from increased pork and chicken production.

Grier predicts processing plant and feedlot closures coming in 2015, continuing a North American trend that stretches back to 2013.  “So the next round of closures that come will probably be more impactful to Canada than the previous round of closures because there are vulnerabilities in the northern tier, if not right in Canada as well.”

And that means more and more work towards gaining control of supplies further back in the chain. “You’re going to be working harder and harder to gain control through feeder cattle,” he told delegates to the Cattle Feeders conference. “Packers are going to be trying to gain more and more control, probably feeding more cattle than they want to because of supplies; the basis on the cash level will be even more volatile.”

Brian Kaufman, Ontario Corn Fed Beef Inc. manager, risk mitigation and trading, told conference goers that record high feeder cattle prices in 2014 meant those finishing cattle in Ontario had few opportunities to lock in a profit on futures markets.

Feeder cattle have been cattle feeders’ single biggest expense. In the United States, calf prices for 450 to 500 pound steers jumped 30 per cent in 2013 over 2012 and jumped a further 53 per cent in 2014 over the 2013 prices. Feeder cattle 750 to 800 lb steer prices were 13 per cent higher in 2012 compared to 2013 but jumped 43 per cent in 2014 compared to 2013.

Since the spring of 2013, feeder cattle futures have jumped 80 per cent.

“The record feeder prices kept break-even values above what the futures market offered for most of the year,” Kaufman adds.

“The market didn’t offer many opportunities to lock in profit this year,” he notes. “In fact, using the forward prices would have in most cases locked in a loss.” Most producers, therefore, decided to wait and see if the futures market would move to where they needed it to be to cover costs, Kaufman says. BF