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Bright outlook for cow-calf sector

If you thought calf prices were good this winter, just wait until next fall.

During the tail end of the 2011 calf run, 550-weight feeder prices averaged around $1.60 per pound.

Barring macroeconomic disasters affecting consumer purchasing power in major markets, calves could punch higher next fall to $1.75 per pound, Brian Perillat, manager and senior market analyst for CanFax, said at Ag Days last week.

“If things fall into place, there’s that potential,” he said.

A global shortage of cattle, drought in Texas and Oklahoma, soaring U.S. beef exports driven by the slumping greenback, excess packer and feedlot capacity, and continued low heifer retention numbers are all working together to put the cow-calf producer in the driver’s seat, he said.

Downside risks exist, however. A hard landing in China; the unknown “domino” consequences should Greece exit the euro zone; and tensions in the Middle East, with their potential for sending oil prices skyward, could derail the good times by pinching the pocketbooks of the middle class, said Perillat.

“I’m very bullish on the fundamentals of cow-calf sector just simply on the supply side,” said Perillat. “Tighter numbers on the supply side are going to bring prices higher.”

Heifer retention in Western Canada is up 8.2 per cent, but only 2.8 per cent in Manitoba and down 2.4 per cent in Eastern Canada, which indicates at best a “stabilization” year, rather than a full-on expansion, he said.

With older ranchers exiting the industry on a high note, ample supplies of dispersal sale bred cows even at $1,400 per head have meant that a lot of $900 open heifers are going to feedlots.

“It’s not the old cattle cycle where everybody is going to keep every heifer, breed her and then dump calves on the market in two years,” he said.

Buying or retaining bred heifers is a “low-risk” investment, mainly because the salvage price of cull cows for ground beef in the coming years is likely to prop up prices, he added. Also, weather conditions in the U.S. will result in less calves coming to market for at least three years.

The outlook for cattle feeders is less bright, even with fat cattle hitting a record $1.25 per pound in the U.S., simply because calves are so expensive, as is the corn and barley needed to put pounds on.

“It’s not as fun for them. They are going to feel the squeeze, but the cow-calf producer is going to get the benefits from a tighter market,” said Perillat.

The drought in the southern states has shrunk the American herd, which is already at record lows. Hardest hit were Texas and Oklahoma, two states where there are twice as many cattle as in Canada. For Canada to take up the slack, the herd would have to grow by 15 per cent, meaning that even strong growth in cattle numbers wouldn’t affect North American supplies.

Significantly, the U.S. became a net exporter of beef for the first time ever. Compared to 2006, when the country imported two billion pounds, it had net exports of 750 million pounds in 2011.

That equals a 2.75-billion-pound shift in beef usage, or the sum total of all of Canada’s production being shifted out of the U.S. market, he said.

“That has tightened up consumer supplies and helped our prices,” said Perillat.

Chicken production south of the border is heading lower, mainly due to high feed costs and slumping demand.

Pork prices haven’t kept up with beef lately, and that may crimp beef’s rise.

But both competing commodities are more dependent on the price of grains, and don’t have the flexibility in feeding alternatives that beef enjoys, said Perillat.

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