Cattle prices beyond belief

Cow/calf producers are smiling all the way to the bank with big cheques for calf sales that they could not have imagined a year ago.

Ahead of the Heard

Cow/calf producers are smiling all the way to the bank with big cheques for calf sales that they could not have imagined a year ago. At some sales 500 lb calves are fetching $1,200 to $1,500, not too long ago that was what finished slaughter cattle were selling for. The rush now is to get in on the gravy train before cattle buyers’ credit limits are reached. One ponders how cattle feeders can pencil out the economics of feeding those expensive calves to slaughter weights. They must be counting on bringing in trainloads of cheap American corn to make it all work.

Interestingly, despite all the COOL import restrictions, a lot of those expensive calves are heading south of the border. That’s driven by the low loonie and the lowest calf crop in 60 years. American packers may be willing to pay anything for finished cattle next spring and summer. Those feeder exports don’t bode well for Canadian packing plants who are already operating at below capacity. When big plants start operating at less than 90 per cent capacity, lower operating efficiencies start to lead to significant losses. If that isn’t corrected there may be consequences – like layoffs and plant closures.

What most market analysts worry about is when will consumer and retailer push back start. There is a threshold of price pain for beef with consumers – I can’t see the average consumer paying $25 for a steak at the retail counter. It’s going to be tough even for high-end restaurants – beef entrees will have to be priced at almost $50 – that’s hard to swallow for most folks. Some marketers are convinced with declining supply that plants and consumers will pay any price, noting that if there was to be a consumer price backlash it would have occurred by now.

No doubt feedlot operators, at the insistence of their bankers, have hedged their feeder cattle and corn and obtained delivery contracts from plants. There are just too many millions at risk with these expensive calves. I also expect with cheap corn that slaughter weights will increase significantly as operators push to put on as many pounds as they can on feeder cattle. Heavier slaughter weights are what have been moderating the reduction in cattle marketing over the past few years particularly in the USA. Are we going to see 2,000 pound slaughter cattle?

High prices have another consequence – herd expansion is almost non-existent. Who can blame producers; it’s hard to hold back a 500 pound heifer worth $1,500 at the auction market. It’s even tougher to buy cows to expand the herd. That’s all on top of the trend for cattle producers to get out of the business altogether and rent their land to crop growers. It’s hard to see herd expansion under those circumstances.

Sooner or later the market will react and someone will face the consequences. Beef consumption may drop dramatically, consumers will substitute with pork or chicken, and offshore imports will increase. That will apply some discipline and prices will decline. One ponders what large buyers like McDonalds will do, at present they take pride (and rightly so!) in selling only Canadian beef. Are they going to want to continue paying high prices for domestic hamburger when their competitors (hello A&W) are sourcing cheaper off shore manufacturing beef. I expect there is a lot of soul-searching going on in the offices of beef buyers across the continent.

Veteran producers no doubt are steeling themselves against the expected market crash – remembering that cattle prices and markets are  cyclical – that being what goes up will come down. It happens despite what supply and demand would dictate – the recent past lamb market is an example of that occurrence. That market three years ago skyrocketed with lambs reaching twice their earlier value. However, it was not sustainable when packers, retailers and consumers pushed back to those higher prices and the market dropped rather quickly. That happened despite the fact that domestic lamb is always in short supply.

One of the side effects of high prices is that it puts beef market development in a state of limbo. The short term question tends to be how much effort and money does the industry put into developing new markets when it looks like it will be difficult to supply those markets. Perhaps now is a time for beef promotion agencies to reduce their activities somewhat and save their money for a later day when we will be able to supply those markets. Just a thought.