NORTH AMERICA - The extreme volatility in North American cattle markets over the past 12 to 18 months has surprised many market analysts, but most believe that the extreme swings are over, and there will continue to be steady, downward movement on cattle prices over the next couple of years, writes Angela Lovell.
“All of the other commodity markets peaked earlier in the decade and they’ve gone through substantial price corrections,” said Randy Blach, CEO of CattleFax, a US beef information organisation, in his presentation to the Canadian Beef Industry Conference (CBIC) in Calgary in August.
“Our markets have corrected about 40 per cent but that’s still not as much as what we’ve seen across most other commodities. So there’s still some risk as we move forward.”
In Canada a lot of cow/calf producers – having enjoyed record prices for their calves just a year ago – are having a hard time accepting how quickly and steeply the market has dropped.
“We’ve seen a tremendous change in calf values – from $3.00 Cdn/lb to $2.00 Cdn/lb – in a very short time,” said Brian Perillat, market analyst for CanFax, which provides marketing information to Canadian cattle producers.
“Cow/calf producers had a couple of phenomenal years because of tight cattle supply and big demand. There’s still profit potential this year for the cow/calf sector. It’s nothing like it was two years ago, but we’re still potentially looking at the third best year in history for our cattle prices, but it’s well short of expectations, which is tough to swallow for some.”
Canada lagging behind the US
Canada’s market has been lagging six months behind the US as the weaker Canadian dollar had initially offset the decline in US prices, which saw its cattle prices peak in 2014 with prices that were higher than anyone predicted, and which have softened dramatically since, from around $1.75 US/lb in the fall (autumn) of 2014 to around $1.15 US/lb today for fed cattle.
That’s partly due to significant herd expansion in the US, which has increased supply. But another significant factor being felt in both Canada and the US is the fact that beef is losing market share to cheaper proteins, such as chicken and pork, production of which continues at record levels.
Exchange rates – particularly against the US dollar – have a direct impact upon Canadian cattle prices. Traditionally, when the Canadian dollar is low against the US dollar (lower than the average of 80 cents US) cattle prices go up. The Canadian dollar has strengthened throughout 2016, although it’s still under the average at around 77 cents US.
“If the dollar rises 10 cents to 87 cents US that would wipe out most of the profits potentially for cow/calf producers this year alone,” said Mr Perillat in his presentation to attendees at CBIC. “I don’t think that’s going to happen, but it’s a very sensitive number that producers should follow.”
A low Canadian dollar is usually good news for cattle exports, particularly to the US. The problem is there aren’t a lot more cattle to export, because Canada’s herd still isn’t expanding, despite the higher cattle prices seen last year. That’s causing some market analysts to wonder when, or even if the Canadian herd will begin to increase.
Canadian packers have also been offering high basis levels to keep Canadian cattle at home and ensure they run close to capacity after suffering from a shortage of supply in 2014, when Canada exported record number of cattle to the US.
No expansion in sight for the Canadian herd
While Canada’s herd doesn’t seem to be expanding, producers are growing existing cattle a lot heavier. Average carcass weights of Canadian cattle rose steeply in 2016, with steers averaging 940 lbs through the first quarter.
The increase in carcass weights added an extra 90 million lbs of beef to the market, so it will be important for producers to monitor the impact that carcass weights will have on overall beef production going forward.
Despite the drop in cattle prices, Canadian retail beef prices remain high, but no one can predict how quickly they will adjust downwards as beef supply increases.
“The retail market could help or hinder. Good retail margins mean better movement of beef and better demand pulling through the supply chain,” says Mr Perillat. “It’s just going to take some time for prices to adjust there.”
TheCattleSite News Desk