Tight Supplies Bode Well For Cattle, Hog Profits Up

The futures markets are sparkling for cattle and looking brighter for hogs, according to two market analysts who took the stage at Ag Days.

Tight supplies pushed April live feeder cattle futures to volatile new highs last week, according to Anne Dunford of Taber-based Gateway Livestock Exchange.

“I’m old, but $1.20 has been the resistance level forever. It broke $1.30 yesterday,” she said, in a presentation on the beef market outlook.

“It doesn’t mean that’s where it’s going. Futures markets are just an indication of what that day’s trade is thinking. But we’re so far above what historical highs have been, that this has got everybody sitting up and paying attention.”

HUGE MOVE

Compared to this time last year, when fat cattle were fetching 75 cents per pound, the latest prices are above $1 per pound, highlighting the “huge” move upward in just 12 months.

The reason? Shrinking cattle numbers on both sides of the border are creating a “demand pull” situation after years of lacklustre prices. And there’s no end in sight, especially given the fact that heifer retention numbers aren’t likely to turn around until at least 2013.

The latest numbers, from last summer, showed only 624,000 heifers held back – the lowest level since 1986.

Since 2005, the Canadian herd has shrunk by 2.5 million head, a dramatic plunge not seen since the late 1970s. January StatsCan numbers due next month are expected to show a further four per cent decline to around 4.3 million head, said Dunford.

Current bred heifer prices have risen from $800 last year to just under $1,200 in recent months, but whether that price signal is strong enough to keep them from going to slaughter remains to be seen, she said.

PLUNGING INVENTORIES

By 2012, Canadian cattle inventories may plunge even further, to 3.1 million head, if heifers start being retained in large numbers.

“Somebody’s going to kill, somebody’s going to feed, and that means we’re going to have 670,000 fewer steers and heifers to put on trucks and move to packing plants,” said Dunford.

“Everybody’s going to feel this – other than the cow-calf guy who’s still left.”

If trends south of the border are any indication, the Canadian herd may continue to shrink, even in the face of higher profitability, because of rancher demographics and other reasons.

CULL RATE

The cull rate, although smaller, is likely to continue at around 12 per cent even after years of liquidation. The slumping economy has kept demand for hamburger high, and prices for cull cows remain at just over 60 cents per pound.

The supply is so tight that packers may have to start throwing front cuts into the grinder, she added.

Depending on who you ask, the loonie could soar to $1.09 or slump to 91 cents, but apart from the risk of extreme swings, the market seems to have adapted to life at par.

The price of barley, which has lagged behind corn’s recent meteoric rise, is not only helping to keep feeder cattle north of the border, but it is also fast turning Western Canada into North America’s lowest-cost hog producer, according to Birtle-based analyst Tyler Fulton, who is the director of risk management for the Manitoba Pork Marketing Co-op.

FEEDING BARLEY

At just under $200 per tonne, barley is helping put Canadian producers in the black in an industry where the cost of feed is generally the most critical factor for profitability.

“Producers are currently being offered forward contract prices that are at, or higher, than the best prices we have seen in the last five years,” said Fulton.

“But we need to see prices up in these levels to maintain production at current levels, just because feed costs are so extremely high.”

Hog numbers in Canada stand at around 15 million head, down considerably in recent years due to the higher dollar and poor profits. This has come about due to the fact that Canadian prices are largely shaped by the exchange rate and the U.S. cash price.

In Manitoba and the eastern Prairies, hog numbers have been less affected by the downsizing trend.

Down south, numbers have been more stable at around 65 million head. Despite high unemployment levels, retail margins in the U.S. are strong, leading Fulton to believe that prices will remain stable.

June futures are showing prices of $160 per hundredweight for slaughter hogs and pushing profit margins as high as $30 per hog for those with hedged feed costs, more than double what’s expected in the U.S. where corn-based rations predominate.

daniel. [email protected]

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Everybody’sgoing tofeelthisother thanthecow-calf guywho’sstillleft.”

– ANNE DUNFORD

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