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MNP is a proud sponsor of CANFAX, a division of the Canadian Cattlemen’s Association. CANFAX has been providing expert analysis and up-to-the-minute information to its members for over 40 years. We are pleased to sponsor CANFAX’s market updates as part of our ongoing commitment to supporting, educating and helping members of the beef industry prosper.
As part of our sponsorship, we are pleased to share quarterly updates from CANFAX to ensure you are kept up-to-date on the latest opportunities and challenges facing this important industry.
For more information on how MNP can assist your livestock operation, contact Scott Dickson, Director, Livestock, at 403.346.8878 or [email protected]
Suffice to say 2015 was another year of new highs for the Canadian cattle market. However, as the year came to a close, it appears the highs are in for this cycle as the market experienced a significant correction. Although average cattle prices in 2015 are record high, the market tone has shifted dramatically. After calf prices were record high for most of the first three quarters of the year, the price swing from the annual highs to the fourth quarter lows were record large. Calf prices dropped 25 per cent from the summer high. That said, it is important to keep prices in perspective, although calf prices have fallen $80/cwt from high to low, prices are still $80/cwt higher than at the end of 2013.
Despite the lower prices, cow-calf producers had another very profitable year, but by year end, feedlot margins have moved significantly into the red. The major market story for Canadian cattle prices over the last year has been the Canadian dollar. The Canadian dollar continues to fall to the lowest point in more than a decade as overall commodity markets are struggling. The weaker dollar will continue to cushion Canadian cattle prices relative to the U.S. in 2016.
Participants in the cattle industry have had a lot to absorb and manage during the last couple of years. After such an incredible run in prices, it is not uncommon for a commodity market to have a quick and major correction. While cattle supplies have not adjusted enough to warrant this major correction, beef and meat supplies have swelled. Pork and poultry production has expanded and the trade balance for beef has shifted back to North America being a net importer again. In addition, as the U.S. herd is expanding, more cattle and beef will be produced in 2016 and 2017. Meanwhile Canadian numbers are stabilizing and may also show small growth moving forward. While supplies are an important market factor, a major driver to the price rally in 2014 was beef demand, but it has been unable to hold beef prices at large premiums to competing proteins. There are a variety of factors that have taken a toll on domestic prices but this market correction reminds us of why consistent and disciplined risk management strategies are critical.
Cattle markets have been volatile, but it is critical to set realistic expectations moving forward. The fact is beef and meat supplies are expanding. Global grain supplies appear to be abundant, and barring a weather market, feed prices should remain moderate. While lower grain prices support calf prices, they can support competing meat production even more.
Volatility in the cattle markets has been extreme as beef prices find equilibrium in a broad marketplace amongst competing meats and global supply and demand dynamics. From both a historical perspective and recent market moves, the U.S.-fed cattle market appears to have support in the $115/cwt (U.S.) range, with the upside likely capped well below the record highs set back in November 2014. The peak prices are in and these past records are not the “new normal”, but we expect overall prices to trade in a new higher range.
In terms of market prices and trends, the U.S. cattle market provides the most guidance for Canada. The U.S. produces about 10 times the amount of beef than Canada, with our cattle and beef products highly substitutable. The major difference in market prices is driven by the Canadian dollar. Although cattle prices have fallen, the Canadian market could be in much worse shape if it were not for the weak Canadian dollar. Looking forward, this could be one of the largest risk factors the cattle market faces. To put this into perspective, when the U.S. market peaked, the Canadian dollar was about 89 cents versus 71 cents now. Given the current cattle market conditions, if the dollar was still 89 cents, calf prices would be another 75 cents/lb lower!
Canadian cattle prices can be projected using the U.S. futures market, the Canadian dollar and basis levels. At the time of writing, the later 2016 U.S. live cattle futures are around $122/cwt U.S. and the Canadian dollar is about 71 cents U.S.. Using a basis of -$5/cwt, this would equate to an Alberta-fed price of $166.83/cwt. Once a fed price is projected, this price can be used to calculate what a cattle feeder would be willing to pay for a calf to put on feed. Assuming a cost of gain to finish a steer calf at $1/lb, feedlots could be willing to pay approximately $2.75/lb for a 550 lb steer. This would suggest cattle markets have found some support at these lower levels and can remain historically strong. That said, they are expected to stay below the highs of $3.30/lb seen in the summer of 2015.
From a technical side, cattle futures have been trending downward since the fall of 2014. In the previous major sell off and sharp rally which occurred last September and October, the futures hit resistance at the 100 day moving average, and virtually the same thing has happened on this latest correction to start 2016. It will be important to watch to see if these resistance levels can be broken, otherwise the downward trend will continue.
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